1. What the heck is a leaseback?!
When we are talking about investing in pre-construction condos, a leaseback agreement is when you buy a condo from a developer and the developer agrees to lease the unit back from when once it is completed for a pre-determined rate and for a pre-determined amount of time. The money is not paid in a lump sum at closing like a cash back, rather, it is paid out slowly each month just like a tenant who pays on the first of the month. The actual tenant pays rent to the developer who in turn pays you (the owner). The tenant may be paying an amount that is more or less than the leaseback amount but the owner always receives the leaseback amount guaranteed (even if the unit is vacant!)
2. Why are leaseback offers becoming so popular?
The pre-construction market is driven primarily by investors. The investors only goal is to make money on their investment. There are traditionally 2 ways to do this: through cash flow and through capital appreciation. Cash flow is when you rent out a property for more than it costs you to own the property. Capital appreciation is when you sell the property for more than what you bought it for. There has been a lot of talk about the current prices of Toronto condos not supporting positive cash flow with the traditional 20% investor down payment in place. These leasebacks are an attempt to lure investors by giving them not just positive cash flow, but in many cases, guaranteed positive cash flow for 1 or 2 years (assuming mortgage rates do not rise dramatically in the next few years).