Several options are available for those who are interested in investing in real estate and mortgages, and syndicated mortgages are one of them.
By investing in a syndicated mortgage, you can essentially participate in a mortgage deal with other investors with as much or as little capital as you can afford to invest. Let’s take a closer look at these investment vehicles, along with the potential returns and risks associated with them.
What Are Syndicated Mortgages?
A syndicated mortgage is one that involves multiple investors who pool their money together to fund a single mortgage. These types of mortgages are typically used to fund an expensive property or development that requires a very large mortgage that may be too much for a single lender to handle.
Each investor owns a share of the mortgage, and the returns are shared proportionately based on the amount each has invested. The investment is secured directly on the land for the full principal amount of each investor, which provides collateral for the investment.
Syndicated mortgages provide attractive investment opportunities for smaller investors who want to take advantage of larger-scale developments but don’t have the significant capital required to do so on their own.
Qualified Vs Non-Qualified Syndicated Mortgages: What’s The Difference?
As of July 1, 2018, the Ontario government amended the Ontario Regulation (O. Reg.) 188/08 Mortgage Brokerages Standards of Practice under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA). Such amendments impacted non-qualified syndicated mortgages, requiring brokerages to adhere to additional criteria.
So, what makes a syndicated mortgage ‘qualified versus ‘non-qualified‘?
Qualified Syndicated Mortgages
A qualified syndicated mortgage is one that meets certain criteria and is generally considered to be low risk. The requirements that syndicated mortgages must meet to be classified as ‘qualified’ are as follows:
- They’re arranged through a mortgage brokerage.
- They secure a debt obligation on a residential property with no more than four units, or a commercial/residential property with no more than one unit that’s used for commercial purposes.
- The debt amount is no more than 90% of the fair market value of the property, excluding the value of any proposed or pending property development.
- They’re limited to one debt obligation with a term that is the same as the syndicated mortgage term.
- The interest rate payable under the syndicated mortgage is equal to the interest rate payable under the debt obligation.
Non-Qualified Syndicated Mortgages
A non-qualified syndicated mortgage is one that does not meet the regulatory requirements to be classified as a “qualified” syndicated mortgage. It’s a more complicated and higher-risk investment that is better suited for more experienced investors with a higher appetite for risk.
Should You Invest In A Syndicated Mortgage?
Syndicated mortgages may offer a unique investment opportunity, but they also come with some notable downsides to consider:
- No guarantees on the return. Some companies or individuals may guarantee high returns on syndicated mortgage investments, but it’s actually illegal to do so. Generally speaking, the higher the potential return, the higher the risk.
- You’ll have to wait in line for repayment. Typically, you’re at least second in line for repayment, behind the financial institution or entity that provided the project loan. If the project doesn’t work out, there might be insufficient funds to repay you after the first lender is repaid. The value of the property might only be enough to pay lenders that are ahead of you.
- No investment protection. If something goes wrong with the project or the individual responsible for paying the mortgage defaults, there’s no guarantee that you’ll get your money back. That’s because syndicated mortgages are not secured by an investor protection fund or the government.
- May be difficult to sell or transfer the mortgage. Syndicated mortgages are highly illiquid, which means they can’t be quickly or easily converted into cash at a fair market price. Like many other investment assets and vehicles, syndicated mortgages are affected by market trends and economic fluctuations, as there may not be a market to sell or transfer the mortgage if you decide to back out.
- Complexity in structure. Syndicated mortgages require extensive and complex legal documentation to protect all lenders involved. Plus, different lenders may have different legal requirements, which can make the process even more complicated.
Investment Limits
Provincial regulatory bodies in Canada set specific limits for investing in syndicated mortgages. These limits are put in place to protect investors from risking too much capital in high-risk investments.
In Ontario, for instance, some investors and lenders cannot invest more than $60,000 in non-qualified syndicated mortgages over a 12-month period.
In a broader sense, regulation of syndicated mortgages, including potential investment caps, falls under provincial jurisdictions. These regulatory bodies include the following:
What To Look For When Investing In A Syndicated Mortgage
Investing in a syndicated mortgage can provide great returns, but it also comes with risks, as mentioned. Before investing in a syndicated mortgage, be sure to look at the following factors:
What Is The Mortgage Broker’s Reputation?
Working with a reputable and experienced mortgage broker is essential. Investors have lost a lot of money in the past by working with brokers who misled investors about where their capital was being invested.
To minimize your risks, it’s important to do a little research on the brokerage you use to invest in syndicated mortgages. Look into the syndicator’s reputation, past performance, and experience. Make sure they’re compliant with the appropriate governing body in your province and real estate regulations.
Further, syndicators and brokers involved in syndicated mortgages must be licensed or registered with the appropriate authorities in their respective provinces. This ensures that they meet specific standards. So, before working with a brokerage, make sure they’re licensed.
Where Are You In Line For Payments?
As mentioned, lenders who are first in line will be paid out first in the event that the deal doesn’t work out. Lenders in subsequent positions may be paid out once the lender in front of them is repaid. So, if you’re investing in a second mortgage, for instance, you’ll be second in line to be paid out, as long as there’s enough money in the pot to pay you.
For this reason, it’s important to assess your risk going into a syndicated mortgage based on what position you’ll assume. First mortgages are typically the lowest risk, but they can come with a lower payout as a result. Higher-risk positions may come with higher returns, as long as you can handle the higher risk.
What Is The Property Value?
Evaluate the property’s value, type (ie. residential or commercial), and location. Generally speaking, properties in desirable locations typically maintain their values over time. You should also assess current real estate market conditions in the area that the property is located in, including other property values and how much other real estate investors in the area are collecting in rent.
If possible, consider inspecting the property yourself in person. While a trustworthy mortgage broker may be completely honest and accurate about a property that you’re pooling your money into, there’s something to be said about seeing the property for yourself to determine its worth before investing.
Final Thoughts
If you’re interested in participating in a mortgage deal but don’t have hundreds of thousands of dollars to invest, perhaps a syndicated mortgage investment may be worth considering. However, as potentially lucrative as they may be, there are also certain inherent risks involved. Be sure to understand what these risks are and only work with a syndicator and lawyer who is trustworthy and experienced in these types of transactions.
