Tips for investing in syndicated mortgages

Q: I’m concerned about the stock market these days, and I am looking to diversify my investments outside the stock market. I’ve recently seen a lot of advertisements for syndicated mortgage products. The ads promise returns of 8% or more 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.

— Syndicated mortgage catch, Calgary, Alta.

A: Syndicated mortgages offer investors the opportunity to participate in the financing of commercial real estate projects by lending money to a developer at a specified rate (usually 8-9%) and term (usually 2-5 years). The 8-9% returns are annualized and not compounded, so your compound annual rate of return will be less than 8%. There may also be a bonus payment at the end of the term depending on the success of the project.

The typical minimum investment is $25,000 to $30,000. Keep in mind: These investments are not guaranteed and they do carry some risk. Most agreements are structured so that the investor is registered directly on title of the real estate investment itself and while this may afford some protection to the investor, there are still quite a few risks to be aware of.

While there is a contract and agreement in place, the returns are not guaranteed and are subject to any and all of the risks associated with real estate development. For example, the project could run into zoning issues, lower than estimated sales, economic issues and there is always the possibility of the builder defaulting on the loan payments. Another drawback is the lack of diversification—as you would typically be investing in one project in one region. These investments also lack liquidity, so depending on the terms of the loan you may not be able to access your money until the end of the term without penalty—if at all.

Some tips:

Work only with a FSCO licensed broker
Have a lawyer review any agreements prior to signing
As with any investment, buyer beware and do your due diligence
Ask about the track record of the developer
Research the area you plan to invest in
Have a good understanding of the proposed development and any potential risks

Ayana Forward is a real estate investor who also holds the Certified Financial Planner (CFP®) designation. Ayana is fee-based Financial Planner with Ryan Lamontagne Inc in Ottawa, ON.