When to invest in a syndicated mortgage

Pooling your money to buy into a syndicated mortgage is a risky investment

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Pooling your money to buy into a syndicated mortgage is a risky investment (Getty Images/Arda Guldogan)

Pooling your money to buy into a syndicated mortgage is a risky investment. (Getty Images/Arda Guldogan)

Q: I’m a long-time MoneySense reader, and find your investment/financial advice and articles always very useful. I’m in my late 30’s, have an owner-occupied triplex, a cash reserve, and a good portfolio of ETF’s. I’m concerned about the potential overvaluation in the stock market these days, and am looking to diversify my investments further outside the stock market.

I’ve recently seen a lot of advertisements for “syndicated mortgage” products. They promise great fixed-income returns of 8+%, with the principal investment “fully secured” through real commercial property titles. I’m assuming it’s all too good to be true, but I don’t quite know where to look for the “catch.”—Brad

A:  Who isn’t enticed by an 8% return? But you’re smart to question whether or not this is too good to be true. My first concern is what sort of risk is an investor taking on in order to get a guaranteed 8% return? Typically with investments the higher the risk the higher the returns.

A syndicated mortgage is where several investors combine funds together to create one financial instrument: a mortgage. When you invest in a syndicated mortgage, you are pooling your money with others to create a mortgage that will be registered and secured directly with the land or building that’s associated with that mortgage.

Ask Home Owner columnist Romana King your real estate question »

Developers and builders use syndicated mortgages as part of their financing to take a project from conception to completion—and this is where the risk lies. Since banks are not too keen on funding a building project that hasn’t even started, developers will rely on syndicated mortgages to cover soft costs: consultant fees, zoning permits, architecture costs and even marketing and sales expenses. All this is to say that the mortgage you’ve provided is funding the initial stages of a project not the actual building of the project. This is a problem if a project gets delayed or goes bankrupt—and this happens. Of course, syndicated mortgage creators will often counter this fear by saying that the mortgage is registered against the land so there’s no real downside. But if something should go wrong, you won’t be paid first. As a syndicated mortgage holder you are second in line, behind any bank loan against the project. Once that debt is cleared, you may see some money.

For this reason, it’s extremely important to do your due diligence when it comes to investing in syndicated mortgages. Scrutinize the track record of the developer (not just the firm that holds and manages the syndicated mortgage); ask to see where, exactly, the project is when it comes to zoning and permits—you want to see these in place so the project can move to the next step. Also, examine the actual location of the project. Does it make economic sense to build a large condo building on the outskirts of a large city?

Syndicated mortgages should definitely be considered a riskier investment so, just like with stock purchases, you’ll need to dig deep to determine if the fundamentals of the project and the subsequent mortgage are strong.
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8 comments on “When to invest in a syndicated mortgage

  1. This doesn’t always have to be done with commercial lending, it is also done through the residential mortgages. 1st and 2nd mortgages for individuals who don’t necessarily fit into the banks “box”. This can be a relatively safe investment with a very nice return, when all is explained correctly. Don’t discount it just because the banks think it’s a bad investment. If the banks were the benchmark moneysense would tell you to keep buying bank mutual funds.

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  2. I totally agree with what Romana is suggesting here with how some developments can be risky but that again is why is it so important to due your due diligence and research on a project and the developer before getting involved o the financing side. Many investors are painting all syndication opportunities with the same paint brush and being sold on the lip stick on many of these deals. Look at the security documents you are signing with a fine tooth comb and make sure features like the loan to value is at a conservative number, the proper appraisals were used to valuate the property, there is an interest reserve account set in place for investors as well as independent legal advice is provided to investors.

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  3. look up paramount equity they offer two investment products one giving 12% the other one 8%. you become a private lender and use existing buildings as your security.

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  4. Private mortgage and syndicated mortgages are very risky investments. People need to be very careful to understand the risk and deal with reputable people. In reality very few people have the risk profile and appropriate understanding to get involved. I fundamentally believe that only accredited investors should ever be allowed in this type of investment.

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    • For private mortgages, you are in a way, the “bank” because you can foreclose if the person does not make payments. You just need to be careful as to where the property is. If you stick with banks and certain invetsment companies, you’re lucky to get 2.5%.

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  5. Calum makes a good point about the risks of these investments and suitability; at some point during the next real estate cycle we may see this type of investment become more heavily regulated. Currently syndicate mortgage products are regulated provincially by the various authorities that regulate mortgage brokers, not securities regulators.

    There are reasons why developers are tapping this source of financing and that reason is not to provide a great product for retail investors.

    The real estate debt market (and private debt in general) is gaining a lot of awareness and popularity among individual and institutional investors for good reasons, but that doesn’t mean it’s a sound idea for retail investors to fund soft costs on development projects before they even get municipal approval.

    The mortgage investment industry is growing because conventional lenders have tightened and there is a demand for alternative credit. Investors may not be aware that there are several ways to get this kind of exposure: private MICs, public MICs, direct lending, and syndication among other structures.

    Achieving a high single digit return in the private debt market can be done without the execution risk that is systematic to development based syndication mortgages. Bottom line: investors are not being properly compensated for the risk they take in this type of investment.

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  6. HI Romana,
    I read your article about syndicated mortgages with interest. Have you heard of Sans Souci Marketing Alliance in Vaughan, ON? They also offer syndicated mortgages with a return of around 9%. I am a 56 year old homeowner, with full time employment and thinking of retirement when I am 70. Any thoughts would be appreciated on Sans Souci would be much appreciated.

    Reply

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