If you’re looking for exposure to the real estate market, or to diversify your property portfolio, the Mortgage Investment Corporation, or MIC for short, is a very powerful investment vehicle. These are popular in Canada for investors who want consistent cash flow, backed by real estate, without the burden of having to assess credit risk and underwriting borrowers. With a MIC you become the bank and earn a healthy return for your portfolio.
Let’s get started by walking you through what they are, how they work, and what to watch out for when choosing a MIC.
How does a Mortgage Investment Corporation work?
A Mortgage Investment Corporation (MIC) is a company that raise capital from many investors (such as you!), and uses that pool of funds to issue and invest in residential and commercial mortgages.
MICs earn interest income from these loans and pay most of that income to their investors every month or quarterly. In other words, you are not lending to one person, but instead you are part of a group helping fund dozens or even hundreds of different mortgages, and you earn a share of the interest income. Lending across a pool of borrowers help reduce risk and is a key strategy for diversification.
Because homes or properties back the loans, there’s something tangible behind the investment. You are participating in earning a return on the group of people the MIC lent money to. The fund earns when lenders make their mortgage payments.
Who does a MIC lend to?
They lend to a variety of people, but usually, people who can’t get approved at a bank or need a bridge loan seek out financing from MICs. That is not to say that all MICs are incredibly risky. The audience is typically self-employed individuals, new immigrants, or real estate developers who may not qualify for traditional loans, but have the capital resources to borrow. The MIC will provide information on their target borrower profile to help you evaluate the risk potential for each investment.
How Much Can You Earn?
Many MICs pay investors between 7% and 10% per year, depending on the type of mortgages they hold. The higher the returns the higher risk the borrowing base may have.
Well-run MICs with an established track record have sophisticated lending procedures, often only lending up to 60%–75% of a property’s value. Th higher LTV (loan-to-value) gives them some breathing room in case a borrower stops paying and the property needs to be sold. You should evaluate carefully with their lending policies, and only invest in the ones that match your risk profile.
What Are the Risks of MIC Investing?
The biggest risk is that borrowers might not repay their loans. If that happens, the MIC has to recover the money by selling the property used as security. This is similar to how a bank recovers funds from a mortgage borrower who might default. This can take time and may not always cover the full amount, especially in a bearish real estate environment.
Another big risk is the liquidity risk which is the ability for you to cash out your investment. Some MICs, such as publicly traded ones, have minimal risk. They allow you to sell your units almost with minimal restrictions.
Other MICs are private and have a similar unit redemption system as some LP Investments. When you own units of a certain class, you can redeem by selling those units back to the fund. This can be subject to some timing restrictions or penalties which vary by investment.
While these aren’t all of the risks of a MIC we have highlighted a few key ones.
Can You Hold MICs in Your TFSA or RRSP?
Yes. Most MICs are setup to take in registered accounts such as TFSAs and RRSPs, which means you can receive your yields as tax-free or tax-deferred income, depending on the account. This makes them especially appealing for Canadians looking to boost their retirement savings or tax-free savings for a rainy day!
Should You Invest?
A MIC is an investment with a higher risk profile then traditional GIC or money market instruments. They certainly offer advantages such as higher yields, diversification, registered funds access, and the passive investment access without having to underwrite and assess credit worthiness of borrowers yourself.
We recommend you consider a MIC with an established track record. Always watch for clear lending guidelines, and transparency about how they manage your money and risk.
At Finalyze, we work with real estate investors and offer tailored market advice to help you put your capital to work. Our accounting, tax, analysis, and advisory services are designed to help you with your finances. We’d love to chat with you further. Book a complimentary call to learn more!