The pitch for pre-construction has always been compelling. Buy today at today's price, pay in installments over the construction period, and take possession of a brand-new property in three to five years worth significantly more. For a decade, that pitch worked.
Now it often does not, and the investors closing on units purchased in 2019 to 2021 are discovering a set of costs and risks that were never modeled at the time of signing. This post lays out exactly what pre-construction investment looks like in 2025, with real numbers, so you can decide whether the strategy makes sense for your situation.
Why Pre-Construction Looked So Good for So Long
Low rates from 2010 to 2021 meant carrying costs were low during construction. Rapid appreciation meant units were often worth more at closing than at signing. Assignment sales allowed some investors to flip contracts before closing, never needing to take possession or secure a mortgage. That window has closed.
CMHC data shows Toronto condo sales fell 75% from 2022 to Q1 2025. In Q1 2025, 55% of pre-construction units remained unsold, just below the record high of 56% in late 2024. This is below the 70% pre-sale threshold lenders typically require before releasing construction financing, which is why project cancellations surged to five times 2022 levels in Toronto and ten times in Vancouver by end of 2024.
The Closing Costs Nobody Talks About
The purchase price on a pre-construction agreement is not what you will actually pay at closing. For a $700,000 Toronto condo, the gap between signed price and total closing cost can easily reach $80,000 to $120,000.
| Closing Cost Item | Typical Amount (Toronto, $700k unit) | Notes |
|---|---|---|
| Development charges | $36,000 to $48,000 | Set by municipality, passed to buyer; check for a cap in your APS |
| HST (net of rebate) | $24,000 to $36,000 | Full HST is 13% ($91,000) but federal and Ontario rebates apply if used as primary residence or rented immediately; investors who do not qualify for the rebate owe the full amount |
| Tarion enrolment fee | ~$1,690 | Regulated, non-negotiable; rises with purchase price |
| Occupancy (phantom rent) | $1,500 to $3,500/month | Paid to developer during interim occupancy before title transfers; not a mortgage payment; builds no equity |
| Common element contribution | 2 months of condo fees | Typically $1,000 to $1,500 at registration |
| Legal and title insurance | $2,000 to $3,500 | Standard |
| Land transfer tax (Toronto) | $12,000 to $20,000 | Municipal plus provincial; first-time buyer rebate does not apply to investors |
Buyers who do not read the agreement of purchase and sale carefully, or who do not have a real estate lawyer review it before signing, are routinely surprised by these figures. The development charge cap clause in particular is a negotiating point that many buyers overlook entirely.
The Appraisal Gap Problem
When a buyer signed in 2019 at $750,000 and closes in 2025, the lender appraises the unit at current market value, not the contract price. CMHC data shows condo resale prices in Toronto fell 13.4% from 2022 peaks and investors in units purchased in 2024 are potentially facing capital losses of up to 6% at closing.
If the appraised value comes in below the contract price, the lender will only finance based on the appraised value. The buyer must inject additional equity at closing to bridge the gap. On a $750,000 purchase appraising at $690,000 with an 80% LTV mortgage, the buyer needs an extra $48,000 on closing day beyond the original down payment.
This is cash that must be liquid and ready. It cannot be borrowed.
Phantom Rent: The Cost Most Models Ignore
Interim occupancy is the period between when a buyer takes possession of their unit and when the condo corporation is formally registered and title transfers. During this period, the buyer lives in or rents the unit but does not yet have a mortgage. Instead, they pay the developer an occupancy fee, commonly called phantom rent, calculated based on estimated mortgage interest, condo fees, and property tax. This is typically $1,500 to $3,500 per month in Toronto for a standard one-bedroom or two-bedroom unit. It builds zero equity.
The period typically lasts three to twelve months but can extend longer in large developments. Investors who modeled their returns without accounting for phantom rent often find their first year of ownership substantially more expensive than projected.
What the Cash Flow Looks Like at Closing in 2025
Consider an investor who purchased a 650 sq ft one-bedroom Toronto condo in 2020 for $680,000 intending to rent it. They close in 2025. Current appraised value: $650,000. The lender provides an 80% LTV mortgage at 5.25% on $650,000, which is a $520,000 mortgage. Monthly mortgage payment on a 25-year amortization: approximately $3,180. Condo fees: $650/month. Property tax: $350/month. Insurance: $80/month. Total monthly carry: approximately $4,260.
Market rent for a comparable unit in 2025: approximately $2,400 to $2,600. Monthly shortfall: approximately $1,660 to $1,860. Annual shortfall: approximately $20,000 to $22,000. This is before capex, vacancy, and property management.
Carrying costs in Toronto and Vancouver have grown 24% and 29% respectively since 2022 while average rents have increased only 15% and 12% in the same period (CMHC, 2025). The math has moved against the pre-construction investor.
When Pre-Construction Still Makes Sense
Pre-construction is not inherently a bad strategy. It can work when you buy in a market with genuine supply constraints and strong long-term demand, you have full visibility into all closing costs before you sign (get a lawyer to review the APS), you have the financial capacity to bridge an appraisal gap of 5% to 10% without distress, and you can carry negative cash flow for at least 5 to 7 years without being forced to sell.
It also fits when you are holding for appreciation over a 10 to 15 year horizon rather than flipping or assigning. Purpose-built rentals and smaller developers in secondary markets sometimes offer better fundamentals than the high-rise Toronto condo market that dominates the news.
The key discipline is running the full closing cost model before signing, not after.
What to Model Before You Sign
| Item to Model | What to Check |
|---|---|
| Full closing costs | Get an itemized estimate from a real estate lawyer before signing |
| Development charge cap | Is there a cap in the APS? What is the maximum exposure? |
| HST rebate eligibility | Will you qualify? If not, add $50,000 to $90,000 to your cost |
| Phantom rent period | How long is interim occupancy estimated to be? What is the monthly cost? |
| Appraisal gap scenario | What happens to your financing if the unit appraises 10% below contract? |
| Cash flow at closing | Model at current rents, not projected rents from 3 years ago |
| Exit strategy | Can you carry this for 10 years if you cannot sell or assign? |
The investors who are struggling with 2025 closings are not all people who made bad decisions. Many made reasonable decisions in 2019 and 2020 using the information available at the time. What changed was the macro environment. The discipline of stress-testing your exit and carrying capacity before signing is what separates an investor from a speculator. For a practical framework, see how to stress test a rental property before you buy.
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This post is for informational purposes only and does not constitute financial, legal, mortgage, or tax advice. Figures are sourced from CMHC, Urbanation, and Condo123 closing cost data and are illustrative. Consult a real estate lawyer before signing any pre-construction agreement. Verify all figures with your mortgage broker, accountant, and relevant professionals before making any investment decision.