Expanding the Potential of Real Estate Bonds
Investing in real estate has gained in popularity. As investors seek higher returns and increased portfolio diversification, real estate, especially real estate development, has risen to the top of the wish list.
Risks with limited partnerships and syndicated mortgages
Developers and builders use limited partnerships and syndicated mortgages as part of their financing in order to bring a project from conception to completion, and this is where the risk lies.
Banks are often not willing to fund a building project that hasn’t even started, so developers routinely rely on these types of financing to cover soft costs such as consultant fees, zoning permits, architecture costs and even marketing and sales expenses. Therefore, the limited partnership or syndicated mortgage that you’ve invested in is funding the initial stages of a project and not the actual building of the project.
This could become a potential problem if the project becomes delayed or isn’t completed, and this does sometimes happen.
Is it worth the risk?
Syndicated mortgage sponsors aim to allay investor fear by promoting the fact that the mortgage is registered against the land so there’s no real downside. However, once construction financing is secured, syndicated mortgage holders take the place of the developer’s equity. An equity position exposes investors to development risk and ranks behind construction financing and any trade payables or creditor debt. Limited partners are shielded against any additional project liability, but they too rank behind construction financing and any trade payables or creditor debt. If something should go wrong once construction begins, syndicated mortgage and limited partnership investors won’t be paid first. Once higher-ranking debt and creditors are paid, you may see some money.
So as an investor, you should ask yourself, is the potential return, worth the exposure? For this reason, it’s extremely important that investors conduct due diligence when it comes to investing in limited partnerships or syndicated mortgages.
A safer alternative
For many investors, real estate bonds are the answer. The key attractions of real estate bonds are reliable returns and the security of a “direct asset security”, meaning they are secured against the title to a property. Real estate bonds are evolving to offer choices with greater earnings potential. A new generation of real estate bonds from SKYIRE (issued by North America Home Finance Inc.) retains that traditional security and predictability, but also offers enhanced returns through profit participation or market appreciation on real estate assets.
Choices in term, growth and tax treatment
SKYIRE Real Estate Bonds combine the direct security of a real estate bond with the wealth-building capacity of profit participation through income, growth rate or development profit. Investors can choose which bond is right for them based on their priorities.
HomeBuild Bonds offer attractive short-term gains and bonding protection for a secured investment. Profit participation derives from proceeds of home sales.
RealIncome Bonds offer tax-efficiency and quarterly cash flow in a mid-term directly secured investment. Profit participation is in the form of income from rental properties, and the capital appreciation of those properties once sold.
RealProperty Bonds offer maximum long-term growth and optimum tax efficiency in a directly secured investment. Profit participation is based on growth in the underlying real estate development.
RealProperty Bonds, RealIncome Bonds and HomeBuild Bonds were all developed for growth and stability by prioritizing capital protection, management alignment and return predictability, as well as attractive, consistent annualized returns. All three bonds are eligible for registered accounts.
Choice of Real Estate Bonds
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