20% down on new construction, pay 80% when building ready (3-4 years)

[Ron S.]

Hi,

This isn't in the US so this format may or may not be familiar to many of you.

I don't own real estate, and I think that now might be a good time to buy NEW construction, but not existing buildings.

You don't have to know market specifics but I would like to see if this actually makes sense, from a purely financial perspective:

Context

If I were to buy an existing house from someone, I'd have to pay them the full amount now and get a mortgage. If I buy something under construction, the developers usually accept a 20/80 split: 20% now, 80% when the building is ready. However, I can pay more upfront or add more to my down payment during development. Usually any amount not yet paid to the developer (the 80%, but I have the option to pay more than 20% upfront) is fixed to an index that represents construction costs, so it can go up (usually) or down. Nowadays you can often negotiate the 80% to be non-fixed.

The plan

Interest rates are high, mortgages are expensive, and generally there are multiple factors pushing down on home prices.

Assuming interest rates should marginally decrease in the next few years, I expect real estate to pick up again. Even without this, I expect the prices to at least keep up with inflation, hence 3-5% annual increase, but we have seen years where real estate increased 20% annually.

I'm looking to buy a new property under construction, roughly $1 million in price (2 bedroom apartment, roughly 800 sqft, plus a balcony). Pay the 20% down now, and get the rest without fixing it to the index. This guarantees that the price in the contract is the final price.

I will wait 3-4 years until construction completes, and then due to tax law, I will have to hold it for 1.5 years after it was built, to get a tax exemption. Otherwise I pay 25-28% capital gains taxes which is the difference between the sell and buy prices. However, if the situation is favorable I might try to sell it before completion, pay the tax, and avoid the mortgage.

Basically this buys me free 5-to-1 leverage on real estate for 3-4 years.

My country has a high population and GDP growth rates and this is in a good location.

Notes

I have the cash to purchase such a property outright.

I currently rent, and rent is very low here (2.5% cap rate).

I'm 29 years old, so my family status might change in multiple ways until construction completes, but I don't plan on living there anyway.

The way I see this, while the building is under construction it's no different than holding an options contract, and I doubt I will lose anywhere close to the 20% down payment. Only problem is I have to exercise the option if I hold it at expiry (construction completion).

This sounds like a good investment idea to me because I can buy myself free 5-1 leverage, gives me extra time to keep saving up, and lock in the rest of the money to purchase the property (say, another 20%) in something solid fixed to the interest rates, so if interest rates go up my additional capital also increases, decreasing the eventual mortgage I'd have to take.

Stocks have been nice this year, but I would like to diversify.