Question of the Week – What are syndicated mortgages?

We’ve received a few questions about real estate investments lately. We’ve also had previous inquiries about syndicated mortgages due to them occasionally turning up in CSA notices in the last few years. The next three weeks the blog will be devoted to real estate investments – specifically syndicated mortgages, mortgage investment entities and real estate limited partnerships. If you’re wondering about real estate investment trusts, or REITS, we covered those in a previous post.

A syndicated mortgage usually occurs when two or more people invest in a single mortgage against one property. They are often used by developers to obtain capital to fund large scale real estate development projects.  Why don’t these developers just obtain their money by using a regular mortgage from a bank? Often they can’t obtain the money from a bank due to the high financial risk of the project.

As you can probably tell syndicated mortgage investments are extremely risky. As a result they are usually not suitable for most investors and may not even be suitable for some accredited investors. Someone looking to borrow money through a syndicated mortgage (a developer for example), would work through a mortgage broker to find investors looking to take on the higher risk of providing a syndicated mortgage in exchange for a higher interest rate than would be offered by a bank. As with any investment the opportunity for higher returns brings along with it higher risk.

The risk in investing in a syndicated mortgage is the chance that the development could fail, and the building might never be built. In this circumstance the mortgage could be foreclosed. Just because a property has been foreclosed does not mean an investor will get back their money. The actual value of the property may not be equivalent to the principal amount of the mortgage and any outstanding interest. A foreclosure process is a long and expensive one which could cut into investors’ returns. An investor in a syndicated mortgage may not be first in-line for repayment upon foreclosure, as any outstanding bank loans would be ahead of them in collecting any money.

One thing to remember if you’re thinking about investing in a syndicated mortgage is that there is no protection on your investment. You’re taking substantial risk that you could lose some or even all the money you’re investing if the development fails.

As with any investment, never invest more than you’re willing to lose. That’s especially true in high-risk investments like syndicated mortgages.