A participation mortgage refers to a home loan that allows multiple people to team up and share in the real estate investment profits. By splitting the proceeds, they’re also reducing their risk exposure.
While Rocket Mortgage ® does not offer participation mortgages, we understand the importance of educating our clients. Let’s look at how participation mortgages work and how they can benefit both borrowers and lenders.
A participation mortgage, also known as a participating mortgage, is a type of loan that allows two or more people to share the proceeds from a piece of property. The lender or mortgagee has the legal right to divide the proceeds from the borrower or mortgagor.
A participating mortgage is also sometimes referred to as participating financing. This agreement can include partnerships between lenders, multiple borrowers or a combination of borrowers and lenders.
Participation mortgages are often used in large commercial real estate transactions, which frequently require multiple lenders to spread the risk. Commercial buildings typically have much higher price points than residential ones, meaning that investors might only be able to afford these properties if they pool their money together.
An equity participation mortgage occurs when two or more parties share the risk of financing a property. By taking on this risk together, the parties involved in the transaction also share in the proceeds from the rental or sale. These mortgages aren’t as commonplace as they used to be but are sometimes used to finance large real estate transactions.
Let’s look at how participation mortgages work and some of the costs involved.
There are various types of payments that a lender can seek for a participation mortgage, and each type can be used in a slightly different way.
Participation loans are used in real estate investing. In particular, they are commonly used in commercial real estate, which predicts the continuous rental income. The borrowers will share in the mortgage and split the proceeds generated from the rental income.
Entrepreneurs will often act as non-traditional lenders in participation loans. These are usually individuals who want to invest in real estate without having to maintain the properties directly. Their investments allow them to earn passive income.
There are pros and cons to a participation mortgage, both for the borrower and the lender. Here are some of the biggest advantages and disadvantages to consider:
A participation mortgage is beneficial both to the lender and borrower, but you’ll need to do your due diligence first. Watch for any red flags in your participation agreement, and make sure the cash flow is divided evenly among all borrowers.
Interested in learning about other ways you can finance real estate investments? Check out our Learning Center or get started with the approval process today with Rocket Mortgage.
Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years. Miranda is dedicated to advancing financial literacy and empowering individuals to achieve their financial and homeownership goals. She graduated from Wayne State University where she studied PR Writing, Film Production, and Film Editing. Her creative talents shine through her contributions to the popular video series "Home Lore" and "The Red Desk," which were nominated for the prestigious Shorty Awards. In her spare time, Miranda enjoys traveling, actively engages in the entrepreneurial community, and savors a perfectly brewed cup of coffee.