The 4 most important things you need to know about closing costs

by www-franklardi-ca

In The Top 4 Reasons I Put My Money Into Condos Instead of RRSP’s, I reviewed all of the reasons I’ve been putting my money to work in the condo market instead of investing in more traditional investment vehicles, like RRSPs. After closely comparing my investment portfolios, I just found that the returns generated by my rental properties far exceeded the performance of my stocks, bonds and mutual funds over the long-term.

When calculating the return on investment (ROI) generated by a new condo investment, I take into account all of the capital tied up in the property, including my down payment and the closing costs. Closing costs are one-time expenses and fees, over-and-above the purchase price, paid by a purchaser on final closing.

The 4 Most Important Things You Need To Know About Closing Costs

1.) Closing costs can vary significantly between different condo developments.

There is no formula for determining the closing costs a buyer will be responsible for when purchasing a new condominium; the amount can vary greatly from development to development.

However, if purchasing a condo in Toronto one can expect to pay approximately $20 – $30K for a studio or 1 bedroom, and approximately $30 – $40K for a 2 bedroom or larger. The most significant taxes, levies, fees, and charges that contribute to the final closings costs paid by a new condo buyer include:

-Toronto land transfer taxes

-Ontario land transfer taxes

-Development charges (eg. section 37 levies, education levies, park levies)

-Utility hook-ups(eg. gas, hydro, water)

-Tarion Warranty enrolment fee

-Miscellaneous fees and charges (eg. mortgage discharge fees, law society fee)

2.) Development charges should always be capped.

Development levies are fees collected from a developer by the municipality; they are intended to pay for the infrastructure (e.g. parks, schools, hospitals, etc.) required to support all of the new residents that will ultimately be living in a new building. Generally, developers absorb some of these costs and pass the balance onto the buyers.

The challenge is that development levies are charged by the city on final closing, so a buyer won’t have a clear picture of their financial obligation until 3 to 4 years down the road, when the building is complete. Therefore, it’s important for a buyer to negotiate a cap on these fees, which essentially puts a limit on how much they’ll have to pay out of pocket.

3.) HST may or may not be included in the purchase price.

The purchase price of a new condominium includes the HST in its entirety only if a buyer or an immediate family member is planning on moving into the suite.

An investor with no plans to live in the property will be required to disclose this fact to his/her lawyer at final closing and will no longer qualify for the HST rebate built into the price. As a result, investors can expect to pay the rebate back to the developer as an adjustment on closing; these funds are then remitted to the CRA.

However, a different rebate for the same amount of money is available to investors if the property is tenanted for at least one year. So, an investor will need to budget for the HST rebate on final closing but after submitting the appropriate paperwork will get all or nearly all of this money back within 60 to 90 days.

4.) Development charges are increasing.

Development charges are a significant source of revenue for the city and it has been raising these fees almost annually to help with its massive budget shortfall. Just recently for example, fees in Toronto nearly doubled, underscoring the importance of negotiating a cap on the development charges in the contract.

On the upside, these levies are an inflationary pressure on prices which ensures that real estate values will continue to rise across Toronto. Investing in hard assets like real estate is a great hedge against inflation.

I hope you found this instalment of the Condo Millionaire series entertaining and informative. In the event that you have any questions about the article, are in need of assistance with buying or selling real estate, or have friends or family looking for a professional Realtor, please don’t hesitate to get in touch. I’d be happy to help in any way that I can.

Click here for the next instalment – What You Need To Know About Interim Occupancy and Occupancy Fees.

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Frank Lardi

Broker | License ID: 4733678

+1(416) 500-4793