For Your Consideration

What Are Syndicated Mortgages?

685 260 CORE Advisory Group

5 Steps to a Smart Investment

Canadians are beginning to think outside the box when it comes to investing in their futures. Conventionally, investors diversified their portfolios using the legacy portfolio model: 40% stocks and 60% bonds. However, more and more people are beginning to recognize the insufficiency of this model in the ever-changing Canadian investment landscape.

With scars from the recent recession still lingering, investors are turning towards hard assets, such as real estate, to further diversify their portfolios and accomplish their financial goals. In Canada, we now have access to more investment options than ever before. Only two decades ago, it was challenging, or even impossible to invest in a REIT, a hedge fund, a managed commodity fund, an international index fund, a derivative, a swap, or other investments.

A syndicate mortgage investment allows investors the opportunity to earn real returns by investing in the communities they reside in or are familiar with. What exactly is a syndicate mortgage? A syndicate mortgage is where several investors pool their funds together to produce one financial instrument – in this case, a mortgage.

Investment structures like these are now available to the everyday investor. When investors invest in a syndicate mortgage, they are participating in a larger financing instrument. With this type of venture, their investment is registered on the title of the property and secured directly to the property being developed, which translates into direct collateral for them against a real asset.

A syndicate mortgage offers developers the capital they require to take their project from conception to completion. How? Because a syndicate mortgage fills a gap, working together with bank financing and developer equity. The syndicate mortgages are usually used to help provide the soft costs of a development – consultants and experts, zoning and architecture, and marketing costs such as a sales centre. Costs which banks and financial institutions cannot finance. By providing these funds via a syndicate mortgage to a developer, the developer is able to do more in a shorter period of time.

Most of the time, a syndicate mortgage is an interest-only loan, meaning the borrower will agree to pay a steady amount of interest on the investment (monthly, quarterly or annually) and agree to pay off the entire loan amount on a maturity date as defined by the terms of the agreement.

To participate in a syndicate mortgage, investors can access this type of investment through a mortgage agent or broker. The structure of a syndicate mortgage investment is simple. If you have ever had a mortgage you are already familiar with how it works. The borrower is expected to make a down payment, like 20 percent, and the lender or bank lends you the remainder amount to secure your home. A syndicate mortgage acts the same way.  The only difference is, the investor becomes the lender to a developer (borrower) to fund a project. It could be a high-rise condo, low-rise single-family development or a commercial complex.

Sounds great so far, right? However, due diligence is a very important part of the process. Here are 5 factors you should consider and research before making the investment:

1) Reputation and Track Record of the developer: Does the developer have the expertise and experience to complete the project?

2) Permits and Zoning: Is everything in place to move the project along? Are they working closely with the town/city?

3) Location: Are there strong economic fundamentals that make this location ideal for the project – such as job growth, in-migration, infrastructure expansions, etc.?

4) Pricing and built-form of the project: Is the neighbourhood absorbing the project and generating sales?

5) Bankability: Have banks lent to the developer in the past and are there banks willing to finance the construction loan for the current project?

If you are searching for a short-term investment managed by industry experts with a proven track record, syndicate mortgages may be the answer. The beauty of syndicate mortgages lies in its simplicity: fixed terms, direct collateral, consistent cash flow and a hard asset that provides security.