Investors warned about popular real estate product

Investors may be tempted by promises of high returns, but one regulator is flagging potential risks and warning the public about these increasingly popular real estate investments.

The Financial Services Commission of Ontario is once again drawing attention to the potential pitfalls of investing in syndicated mortgages.

“Over the past year, the Financial Services Commission of Ontario (FSCO) has taken considerable action in the syndicated mortgage investment (SMI) marketplace to help consumers,” FSCO wrote in a warning note, entitled Before Investing in a Syndicated Mortgage. “While there are many legitimate SMI opportunities, FSCO warns consumers to be wary of SMIs with advertisements promoting a high return or ‘fully secured’ investment.”

Syndicated mortgages, which are pooled investments often used to cover soft costs for real estate developments, have been growing in popularity among investors.

Many syndicated mortgage providers promise high returns and low risk; however, FSCO has put forth a list of potential risks involved.

Those risks include; no guaranteed high returns, despite promises made by syndicated mortgage providers; the fact that investors are often only paid after the lender and, if a project fails, investors may never see returns; the lack of protection insurance; and the possibility that early withdrawals may be difficult.

The investments are often offered by mortgage brokers. However, many have been critical of syndicated mortgages.

“I have been advocating for ending mortgage broker involvement in large syndicated mortgages for years. This is simply not a product that mortgage brokers should be selling,” Ron Butler, a broker with Butler Mortgage in Toronto, wrote in response to a article about FSCO’s warning. “That being said mortgage brokers have been successfully dealing in private mortgages for years and have been by and large doing a very good job for their investors.”

To read the entire document, click here.

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