Josh is a personal finance enthusiast and writer. He began helping people learn how to refinance their homes in 2008 and has been learning and teaching mortgage and money matters ever since.
Published Jul. 11, 2022 Read time 6 minReady To Buy a Home?
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Start My ApplicationHave you ever wished you could invest in real estate without spending all your savings? Well, a participation mortgage might be the perfect solution for you.
A participation mortgage allows multiple people or entities to team up and share in real estate investment costs and profits, while also reducing each participant’s risk exposure on a mortgage.
To be clear, reduced risk isn’t no risk. Before you invest, make sure you know and understand the different types of participation mortgages, how they work and the risks involved.
Let’s take a closer look!
A participation mortgage allows multiple parties to pool their money to buy a property.
Normally reserved for large, complex deals between real estate investors, participation mortgages can also be implemented by:
Participation loans are not exclusive to commercial real estate. They can be used for any asset you want to rent out.
The participants all share in the profits and losses of the investment, and usually each participant is responsible for a portion of the mortgage payments. A participation agreement outlines the terms of a deal and helps ensure all participants are on the same page in terms of their investment goals and financial commitments.
Let’s say you and two entrepreneurially minded friends are interested in purchasing a hot rental building that just hit the market, but none of you can afford to buy the building on your own.
After some thoughtful conversation, brainstorming and market research, you all agree to use a participation mortgage and evenly split the cost of the $3,000,000 building.
All the mortgage details are outlined in the participation agreement – which is usually drafted by an attorney retained by the lead lender, lead borrower or third-party entity overseeing the purchase.
The details include the roles and responsibilities of each participant, like who makes the monthly payments and what happens if someone wants to sell their share. The terms of the participation agreement will be up to you and your two entrepreneurially minded friends.
Each of you put $250,000 down toward the purchase of the rental building, leaving you with a total mortgage of around $1,250,000, not including interest, closing costs and other expenses.
You each own one-third of the property and are responsible for one-third of the monthly mortgage payment. You decide to evenly split any rental income and share equally in the profits and losses when the property is sold.
The complexity of a participation mortgage depends on the participants and what is included in the participation agreement.
Let’s say the three participants from our previous example agree one person is responsible for making the monthly mortgage payments, one person is responsible for upkeep and repairs and one person is responsible for marketing and finding new tenants. This helps ensure each participant is contributing to the success of the investment and helping to reduce the risk for everyone involved.
Of course, arrangements can get far more complicated than this example. Participation mortgages tend to be more complex transactions involving numerous real estate investors, such as institutional investors, pension funds or financial institutions, and the deals may include multiple lenders, too.
Repayment terms are also spelled out in the participation agreement. The various repayment options are:
It all depends on what the participants have agreed on.
Money Term Balloon PaymentA large lump-sum payment made at the end of a loan’s term, usually in exchange for lower monthly payments over the life of the loan.
