Over the years you may have heard an increasing amount of talk about mortgage investment corporations, or MICs. But what are they, and what can they do for you?
The housing industry has been the main driver of Canada's economy for quite some time. Whether or not that will continue is up for debate, but if you’re one of the many thousands of people who want to take advantage of the phenomenon, then you're not alone. The question is whether or not you want to get into the market by buying a home for yourself, investing in property purely for profit, or some combination thereof. While being a property investor can mean buying a piece of property and renting out units, investing in property can also mean investing in a MIC.
The ins and outs
A MIC is financed by investors who put their money into a pool to fund groups of mortgages, and all of the investors hold shares in the MIC. Unlike being a landlord and handling the responsibility of maintaining the property and dealing with tenants (or at the very least, hiring a property manager to do the dirty work), once you invest the money into a MIC, your work is done; a management company deals with the administration of the investments, including picking the mortgages that are funded as well as dealing with the administration of the company as a whole. For the most part, the funded mortgages are for residential properties.
MICs have been around for more than 40 years, and were created in order to increase the flow of mortgage funds and make investing in residential real estate more attractive and accessible to the average John or Jane investor, who is interested in investing on a small-scale. In spite of being around for decades, MICs seem to have been gaining traction recently because of their returns that can be fairly high relative to the level of risk involved. Fifteen years ago, some MICs may have garnered double-digit returns as a matter of course. Those days are long gone, but returns still tend to be around five per cent at the very least, which is well over the rates currently offered by some of the other “safe” places that cautious people tend to park their money, such as high-interest savings accounts or GICs. Those returns are now negligible since interest rates have been so low for so long.
MICs aren’t a fly-by-night scheme. If you haven't heard of them before, you should know that they have to operate under certain rules, including:
MICs can be large or small, and while a bigger MIC means that they have more capital to invest in more mortgages, smaller MICs tend to be more discretionary when it comes to the types of mortgages that they finance. All types of MICs specialize in giving short term loans, bridge loans, and mortgages to entrepreneurs or anyone else who can’t get a loan with a major lender. Due to the higher risk profile of these borrowers, they can be charged a higher interest rate.
How do you benefit?
Investing in property by becoming a landlord can be a difficult balance. If you are renting out the property or the units within it and have good cash flow, then you may well see monthly profits in the short-term, but really, the money is made when you sell that property. If you invest in an MIC, however, interest on your investment is calculated monthly, so you are guaranteed to have monthly returns. One hundred per cent of the profits are also guaranteed back to investors each year. This does not mean that your investment is guaranteed; just that all of the profits of the MICs go back to shareholders. As an investor you get dividends that are proportional to your investment.
In addition to being secured in brick and mortar assets, MICs abide by strict reporting and audit regulations. MICs are also available under the umbrellas of TFSAs, RRSPs, RRIFs, LIRAs, and other registered savings vehicles. Fees are charged for keeping them there, but this will ensure that you pay as little as possible in taxes, as the dividends you receive will be taxed as income.
Public and private
There are differences between publicly-traded and privately-traded MICs. If an MIC is publicly traded, there are no requirements when it comes to minimum investment or being an accredited investor (which, for an individual means being, among other things, a high net worth individual with substantial financial assets). Publicly traded MICs tend to be more liquid than their private counterparts and, as you might expect from a public company, there tends to be more transparency. The market value of public MIC investments fluctuate daily. This shouldn't deter investors, however, who tend to be in the game for the long haul. There’s often an extra annual dividend as well as the monthly ones that are standard.
Most MICs, however, are private entities. Mortgage lenders tend to either deal in what's called A business, which is for prime borrowers, people with good credit and stated income, or B lenders, who do business with less-than-ideal borrowers. MICs are private lenders, which fall under the latter category.
Risks
Contrary to what some people believe, MICs aren’t thought of as being high-risk investments. But like many investments available, the risk isn’t about the vehicle itself, but about the makeup of loans within the individual portfolio. As long as the MIC abides by the rules outlined above, the options are varied and can include construction loans, bridge financing, residential complexes including condominiums or multi-family complexes, and these options tend to be riskier than a typical single-family residential mortgages.
Apart from the types of mortgages within the portfolio, other things to consider when considering a particular MIC is whether or not the corporation limits the amount of money invested with one particular mortgage or borrower; how high the loan-to-value ratio is for any one property; and the fees associated with your investment, whether they’re paid upfront, when you get your dividends, or somewhere in between. And, as always, how diversified the portfolio is in general, as more diversification protects the investment from certain risks.
If you’re unsure of where to invest your money, MICs are definitely worth a closer look. There’s a lot to consider, but even for the cautious investor, MICs can be a way to profit from the mortgage market while maintaining a passive investment.
The housing industry has been the main driver of Canada's economy for quite some time. Whether or not that will continue is up for debate, but if you’re one of the many thousands of people who want to take advantage of the phenomenon, then you're not alone. The question is whether or not you want to get into the market by buying a home for yourself, investing in property purely for profit, or some combination thereof. While being a property investor can mean buying a piece of property and renting out units, investing in property can also mean investing in a MIC.
The ins and outs
A MIC is financed by investors who put their money into a pool to fund groups of mortgages, and all of the investors hold shares in the MIC. Unlike being a landlord and handling the responsibility of maintaining the property and dealing with tenants (or at the very least, hiring a property manager to do the dirty work), once you invest the money into a MIC, your work is done; a management company deals with the administration of the investments, including picking the mortgages that are funded as well as dealing with the administration of the company as a whole. For the most part, the funded mortgages are for residential properties.
MICs have been around for more than 40 years, and were created in order to increase the flow of mortgage funds and make investing in residential real estate more attractive and accessible to the average John or Jane investor, who is interested in investing on a small-scale. In spite of being around for decades, MICs seem to have been gaining traction recently because of their returns that can be fairly high relative to the level of risk involved. Fifteen years ago, some MICs may have garnered double-digit returns as a matter of course. Those days are long gone, but returns still tend to be around five per cent at the very least, which is well over the rates currently offered by some of the other “safe” places that cautious people tend to park their money, such as high-interest savings accounts or GICs. Those returns are now negligible since interest rates have been so low for so long.
MICs aren’t a fly-by-night scheme. If you haven't heard of them before, you should know that they have to operate under certain rules, including:
- By law, MICs are tax-exempt, and to retain that designation, it must hold at least 50 per cent of its assets in residential mortgages, CDIC-insured bank deposits, or credit union deposits, or a combination of the above
- A MIC must have at least 20 shareholders/investors
- No shareholder may hold more than 25 per cent of the MIC’s total capital
- A MIC may invest up to 25 per cent of its assets directly in real estate, but may not develop land or engage in construction
- A MIC is a flow-through investment vehicle and distributes 100 per cent of its net income to its shareholders.
- Dividends that investors -- shareholders -- receive from directly held shares are taxed as interest income
- A MIC’s annual financial statements must be audited
- A MIC may employ financial leverage by using debt to partially fund assets
MICs can be large or small, and while a bigger MIC means that they have more capital to invest in more mortgages, smaller MICs tend to be more discretionary when it comes to the types of mortgages that they finance. All types of MICs specialize in giving short term loans, bridge loans, and mortgages to entrepreneurs or anyone else who can’t get a loan with a major lender. Due to the higher risk profile of these borrowers, they can be charged a higher interest rate.
How do you benefit?
Investing in property by becoming a landlord can be a difficult balance. If you are renting out the property or the units within it and have good cash flow, then you may well see monthly profits in the short-term, but really, the money is made when you sell that property. If you invest in an MIC, however, interest on your investment is calculated monthly, so you are guaranteed to have monthly returns. One hundred per cent of the profits are also guaranteed back to investors each year. This does not mean that your investment is guaranteed; just that all of the profits of the MICs go back to shareholders. As an investor you get dividends that are proportional to your investment.
In addition to being secured in brick and mortar assets, MICs abide by strict reporting and audit regulations. MICs are also available under the umbrellas of TFSAs, RRSPs, RRIFs, LIRAs, and other registered savings vehicles. Fees are charged for keeping them there, but this will ensure that you pay as little as possible in taxes, as the dividends you receive will be taxed as income.
Public and private
There are differences between publicly-traded and privately-traded MICs. If an MIC is publicly traded, there are no requirements when it comes to minimum investment or being an accredited investor (which, for an individual means being, among other things, a high net worth individual with substantial financial assets). Publicly traded MICs tend to be more liquid than their private counterparts and, as you might expect from a public company, there tends to be more transparency. The market value of public MIC investments fluctuate daily. This shouldn't deter investors, however, who tend to be in the game for the long haul. There’s often an extra annual dividend as well as the monthly ones that are standard.
Most MICs, however, are private entities. Mortgage lenders tend to either deal in what's called A business, which is for prime borrowers, people with good credit and stated income, or B lenders, who do business with less-than-ideal borrowers. MICs are private lenders, which fall under the latter category.
Risks
Contrary to what some people believe, MICs aren’t thought of as being high-risk investments. But like many investments available, the risk isn’t about the vehicle itself, but about the makeup of loans within the individual portfolio. As long as the MIC abides by the rules outlined above, the options are varied and can include construction loans, bridge financing, residential complexes including condominiums or multi-family complexes, and these options tend to be riskier than a typical single-family residential mortgages.
Apart from the types of mortgages within the portfolio, other things to consider when considering a particular MIC is whether or not the corporation limits the amount of money invested with one particular mortgage or borrower; how high the loan-to-value ratio is for any one property; and the fees associated with your investment, whether they’re paid upfront, when you get your dividends, or somewhere in between. And, as always, how diversified the portfolio is in general, as more diversification protects the investment from certain risks.
If you’re unsure of where to invest your money, MICs are definitely worth a closer look. There’s a lot to consider, but even for the cautious investor, MICs can be a way to profit from the mortgage market while maintaining a passive investment.
