HomeBuild Bonds Offers Safer Alternative for Real Estate Development Investing
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.
We’ve all heard stories from friends or relatives about how they or someone they know has done well investing in real estate. Part of its popularity is due to the fact that growth in this sector has been greater than so many other investments.
And if you do your research and plan your investment properly, real estate can be a key part of your overall investment portfolio and retirement planning strategy. This is because of the sector’s non-correlation to the market. Not only can this sector provide investors with growth and income, it can also provide additional diversification when combined with a traditional investment portfolio of stocks, bonds and mutual funds.
Limited partnerships and syndicated mortgages
Over the past few years, limited partnerships and syndicated mortgages have become a popular choice for many real estate investors. Who wouldn’t be enticed with attractive returns including potential bonus capital gains that many of these investments promote? The question investors need to ask themselves is what are the risks? In investing, the “rule of thumb” is the higher the return, the greater the risk.
A real estate limited partnership (RELP) is an entity organized around an investment manager or developer who acts as the “General Partner”. The general partner is responsible for carrying on the business of the limited partnership (development) and is liable for all of the obligations of the limited partnership. The developer in this case has complete discretion over management and limited partners receive their capital back after lenders, creditors and any other trade payables.
More popular in Ontario, a syndicated mortgage is where several investors combine funds together to create one financial instrument − a mortgage. When you invest in a syndicated mortgage, your money is pooled with others to create a mortgage that is registered and secured directly with the land or building that’s associated with that mortgage. Developers may use this syndicated mortgage capital as a substitute for their equity and it will rank behind the bank loan used for construction financing.
Risks involved with 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 goes bankrupt, and this does sometimes happen.
<Boxed offer for resource guide>
Free guide and book offer
There is a way to invest in real estate development without development risks. Order your HomeBuild Bond investor guide today <link>. It outlines everything you need to know about HomeBuild Bonds, how they can help you invest in real estate development, earn attractive returns and avoid development risk. We’ll also include a copy of out recently updated Residential Investing book <link>. It’s been written to help anyone, regardless of their level of knowledge, to become a wiser and more knowledgeable investor in real estate.
Order your guide today <link>.
<End boxed offer>
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 rank behind this new debt, and become exposed to development risks. Limited partners are shielded against any 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 risk? There are also other development risks that you could be exposed to such as:
- Land value risk: Land acquisition costs and the risk that the value of acquired land changes due to market circumstances.
- Land contamination risk: The risks mainly related to environmental issues.
- Planning permit risk: The risk that no usable planning permit is received or that this process takes longer than expected. This risk also applies to other municipal approvals/permits, such as commercial licenses.
- Construction risk: This regards pricing, design, quality and possible delays.
- Pre-sales achievement risk: There are many factors that influence absorption. These include sales price levels, inflation and interest rate levels, demand and supply.
- Duration risk: The duration is a consequence of other risks. It can impact interest costs, but can also cause other problems, such as claims from buyers/tenants if the agreed completion date is not met. A delay could also mean that the project has to face adverse market circumstances.
- Political risk: The risk that the project encounters problems due to a change in government, regulations, etc.
- Partner risk: The risk that a partner in the project cannot meet its obligations or disagrees on the way forward.
- Legal risk: This covers a broad area of topics: possible objections against changes in zoning, liability risks or contracts which have not been drawn up correctly. It also concerns the risk of not obtaining the required permits and the risks involved with buying existing companies to acquire land positions. Tax risk is also included in the legal risk.
Additional risks with limited partnerships that put an investor’s return at greater risk include:
- Most limited partnership agreements give complete direction and authority to developers to operate its business affairs as they seem fit, no matter what the circumstances (e.g. cost overruns, project delays, etc.).
- Overall costs can be much higher in limited partnership arrangements, including ongoing administration costs (reporting, filing and other overhead costs).
- In addition to exposure to all development risks outlined above, all units in a development project must be sold in order for investors to realize a return.
For this reason, it’s extremely important that investors conduct due diligence when it comes to investing in limited partnerships or syndicated mortgages. Scrutinize the track record of the developer (not just the firm that holds and manages the limited partnership or syndicated mortgage); ask to see where, exactly, the project is when it comes to zoning and permits; you want to see these in place so the project can move to the next step. Also, examine the actual location of the project. Does it make economic sense to build a large condo building on the outskirts of a large city?
A safer alternative
Up until now investors faced all of these varying degrees of development risks but now they don’t have to.
SKYIRE Home Corp. is excited to introduce an advanced investment strategy as an alternative to what is available in the market today. This new financing approach for developers and investors is called HomeBuild Bonds and creates the return of a development project but eliminates the development risks outlined above.
HomeBuild Bonds − How they work
This new type of investment uses bonding protection that eliminates development risk and provides an attractive return. In addition to collateral mortgage security, HomeBuild Bonds also have the added benefit of a bonding company’s assurance, protecting not only the principal investment but the minimum return as well, until the development is complete.
HomeBuild Bonds were developed utilizing a Four Cornerstone approach to investing. Collectively, these Cornerstones (Capital Protection, Management Alignment, Return Predictability and Revenue Participation) form a foundation that helps ensure maximum protection and investor return. (In our next article, we discuss these Four Cornerstones and their benefits in greater detail.)
Sponsored by North American Home Finance Inc., Home Build Bonds are the clear choice investment to achieve real estate development returns in your portfolio, while diversifying from the stock market and managing risk. Find out more about HomeBuild Bonds and how to get them into your investment portfolio today.
Get your free guide and book
There’s a lot more to learn about HomeBuild Bonds and residential real estate investing.. Order your HomeBuild Bond investor guide today <link>. It outlines everything you need to know about HomeBuild Bonds, how they can help you invest in real estate development, earn attractive returns and avoid development risk. We’ll also include a copy of our recently updated book, Residential Investing <link>. It provides great insight on what to look for in a real estate investment and why Canada is a great market for real estate investing.
Take advantage of this great offer today!