Jun 232014
 

MICs – Real Estate Investment Through Debt

It appears both the real estate and stock markets in Canada are at all time highs 😯 Meanwhile yields on bonds and GICs are still near record lows. 🙁 Even cash is losing its appeal because energy and food prices have pushed the inflation rate to a multi-year high. Which begs the question: Where can we still find value? What should people be investing in now?

Well I think I have the answer! 😉 In May I blogged about looking into mortgage investment corporations. After some further research I bit the bullet and earlier this month I invested $10,000 in a mortgage investment corporation. This new investment generates a stable 7%+ annual return, uses real estate as collateral, thrives under inflationary pressure, is hedged against the risk of increasing interest rates, can be redeemed at any time with no penalties, and adds stability to my portfolio because a stock market correction would not affect my $10K principle balance at all.

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A mortgage investment corporation lets investors pool their money together to be lent out as mortgages. It essentially allows the average investor like you and I to participate in, and profit from, the mortgage lending business. 😉 This is the best thing since canned peaches! Banks make a lot of money by collecting interest on mortgage loans right? Well retail investors can also get in on this lucrative business model. Booyah! 😀

A mortgage investment corporation is also a great hedge against inflation. If interest rates rise, a MIC’s return would also increase because higher mortgage rates mean more profit! People who invest in a mortgage investment corporation do not own the real estate. MIC investors simply make money from the enviable position of being a lender! It’s like peer to peer lending in the U.S., Estonia, or other parts of Europe, except every loan in a MIC is secured by real property. 😉 What a lollapalooza!

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What Does a Mortgage Investment Corporation do Exactly?

Many hard working Canadians who want to buy a house cannot get mortgages from traditional banks because perhaps they’re self employed, or don’t have an established credit history yet. Or maybe they want a short term loan to develop a large property or make some renovations. Banks tend to ignore these potential borrowers because self employed Canadians don’t have stable incomes. Also short term loans aren’t worth the bank’s time and resources to underwrite because they would rather lend out 25 year mortgages with predictable long term profitability. Commercial renovations and construction projects like apartment buildings are too risky for banks to get involved in unless the borrower commits to a 50% or greater down payment, but most people simply don’t have that kind of money. 😕
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Alas, the market needs another kind of lender. So mortgage investment corporations were created to address this demand. Mortgage investment corporations specialize in giving short term loans, bridge loans, and mortgages to entrepreneurs or anyone else who can’t get a loan with a major bank. And due to the higher risk profile of these borrowers, they can be charged a higher interest rate.
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Today in 2014 most conventional mortgage rates are around 3%.
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However mortgage rates from a MIC is usually around 9% to 12% 😀 Not bad eh? Management fees and other costs associated with running the MIC eat away about 2% to 4% of the total income, so investors can expect net returns of about 5% to 10% before tax, depending on the mix of mortgages. Here’s an example of a property financed by a MIC.
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14-06-antrim-okanagan-mortgage mortgage investment corporation
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How to Invest in a MIC

There are dozens of MICs across the country to choose from. Some are publicly traded on the Toronto Stock Exchange while others are private. Obviously public MICs will be more liquid and fluctuate daily based on stock market movements. Below are some names that I’ve come across. Publicly traded mortgage investment corporations have their ticker symbol in parenthesis.

  • Fisgard
  • Westboro Mortgages
  • Timbercreek (TMC)
  • Trez capital (TZZ)
  • ACIC
  • Firm Capital (FC)
  • MCAN Mortgage Corp.
  • Canadian Horizons
  • Frontenac
  • Atrium (AI) 
  • Magenta
  • Crossroads DMD
  • Great Pacific
  • Antrim Investments.

The names bolded in green are the ones I like.

Here are some questions you may want to ask when choosing a MIC that’s right for you:

  • What is the maximum Loan to Value of a mortgage? I would consider anything over 75% to be too risky.
  • What is the minimum investment amount? For private MICs it usually ranges from $1,000 to $100,000.
  • What is the mix between 1st and 2nd mortgages? Senior loans are safer but yield less interest.
  • What is the size of the MIC fund? I personally wouldn’t invest in a mortgage portfolio worth less than a $10 million.
  • How much does management get paid? This information can be found in the offering memorandum which is the MIC equivalent of a mutual fund prospectus. Large fees can eat into investors’ returns.
  • How to get out of the investment and are there any redemption fees? Some MICs have restrictions on the withdrawal process. Ask the company for details.

To make things easy I recommend keeping your findings organized for comparison purposes later, like this for example.

The MIC I have chosen is Antrim Investments. They are located in Greater Vancouver, B.C. and primarily focus on residential mortgages and small commercial loans. Here’s a look at Antrim’s historical returns.

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I feel like the asset allocation, expected returns, and diversification of real estate for this MIC suit my risk tolerance and investment needs so that’s why I chose this one. Over the last 3 years the annual return has been 7.17% to investors, so I will assume 7% as the expected return on my new $10,000 MIC investment for the time being. Here’s a breakdown of where I got my investment money from.

$5,000 May’s Rental income.
$2,000 Home Equity LOC (3.5% interest.)
$3,000 Margin Loan (4.25% interest.)

$10,000 = Total 

I didn’t even have to save any money to make this investment. Passive income made up half the funding, and the other $5,000 came from borrowed bank money lol. I know using leverage increases my risk but I’m only young once so I might as well enjoy life to the fullest. 😆 Besides, I’m only paying an average interest rate of 4% on my combined $5,000 loan from the bank. Since the MIC returns 7% every year I get to pocket the 3% difference. Yay! I can get rich faster this way. 🙂

To invest in publicly traded MICs we simply buy their shares, just like any other stock. But for private mortgage investment corporations like Antrim we have to buy it through a trustee, which is a third party company that holds our funds. This added level of regulation is to protect investors from possible conflicts of interest or fraud. A popular trustee in B.C. and Alberta is Canadian Western Trust.

To open an account with Canadian Western we simply fill out an application form which can be found on its website. Next we give instructions to our trustee to buy shares of the MIC we want. Here’s my example. Personal information has been blacked out for security reasons.

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We’ll also need to mail a cheque to the trustee which will represent our first deposit. About 2 weeks later we should see money in our new trust account 😀 There is an annual fee to hold a TFSA account with Canadian Western, and a $100 transaction fee to make any buy or sell orders. The people at Antrim helped me fill out most of the trustee paperwork so the process went pretty smooth. I expect to receive quarterly interest payments on my new investment starting next month 🙂

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But MICs aren’t all that and a bag of potato chips 😛 There are real risks too. Like any loan contract there’s always the chance for the borrower to default on the debt. However most MICs maintain a margin of safety by keeping a reasonable loan to value ratio. In the case of a foreclosure a MIC will have the recourse to reposes the property. But even when the Canadian real estate market stagnated in the 1990s, the default rate for residential mortgages never exceeded 0.66%. For comparison the average default rate of North American corporate bonds between 1982 and 2010 was higher at 1.01%, according to Jane Knop, managing director at First Swiss Asset Management.

Overall I think MICs are great alternative fixed income investments that generate stable income, preserve capital, and diversify one’s portfolio. With potential bubbles forming in all conventional asset classes like stocks, bonds, and real estate, MICs offer a very favorable risk to return ratio and is my pick for the investment category of the year for 2014 😀

Sources for my research:
David Kaufman explains MICs in CBC interview
MoneySense article on MICs
Financial Underdog’s MIC post.
Inside MICs on Canadian Mortgage Trend
Other MIC websites, etc

[Edit July] Update. I have just purchased 2 additional MIC funds. This time, publicly traded ones on the Toronto Stock Exchange. [/edit]

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36 Comments on "New Purchase – Mortgage Investment Corporation"

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Brian
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Brian

I don’t think comparing default rates of corporate bonds to mortgage defaults in a very apples to apples comparison. What happens if you get a housing market crash like the States experienced in the last few years?

debt debs
Guest

The MIC fund is diversified across many many mortgages, right? So if a few default, it is shared by the entire fund so you are no worse off than the rest of investors. Not like giving a second mortgage to Uncle Harry and he defaults. I don’t know why I brought up Uncle Harry, he’s dead and he was actually my Dad’s uncle and a good guy. 😉 I think I might put him on my “Napoleon Hill’s” invisible counselors technique panel even though I never met him and just saw a picture. #digre$$

DivHut
Guest

Thanks for sharing this info about MICs. Just learned something new today. I guess as income investors we need to start looking outside the traditional dividend growth stocks especially since so many of them are at all time highs with equally high PE’s.

Matt
Guest
Matt

Aren’t you concerned that the spread of 3% between expected returns and the interest you’re going to be paying to be a little low. Obviously inflation will eat up what is left over. It seems like a lot of work for a small upside. I do appreciate you explaining the process for all of us to consider such an investment!

David
Guest
David

Why did you go with a private MIC vs. a public MIC? There can be lots of fraud in this segment.

Also, not sure I agree that MICs won’t react negatively to higher rates….just look at the charts in from April 2013.

alana
Guest
alana

hey this is great. I’m a recent immigrant to Canada and im eager to learn more about Canadian investment options. Enjoy reading about all your investing exploits even before coming to canada so keep em coming. Real estate is an asset I can relate to, MICs sound promising. Gonna do some reading

myroadtowealthandfreedom
Guest

Thanks for sharing this post Liquid. I must admit my initial impression was that MICs were risky investments but from what I can tell they are less risky than high yield “junk” bonds and you get a slice of the real estate in the event of a default. Definitely something to consider for my fixed income portfolio.

JB
Guest

Thanks for your comment on my blog. Wonder how my Swedish blog found a visitor in Canada. Interesting read you have here. Another hint on the toast is to bake the bread yourself. Even cheaper. I haven’t bought bread in the store for years.

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[…] by the graph I think history suggests that buying some MICs now would add stability to our portfolios and create lower volatility if another large recession […]

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Ashe Guide - League of Legends

[…] demand. Although all of my stuff will always be free, any money received will be put into my “New Mic Fund&#8221. A Private Island, whichever comes […]

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[…] bonds in my retirement account. MICs: $15,000 – Mortgage investment corporation units I hold. MICs are fixed income securities that pay better than bonds, but are relatively less risky than stocks. […]

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[…] and bonds in my retirement account. MICs: $15,000 – Mortgage investment corporation units I hold. MICs are fixed income securities that pay better than bonds, but are relatively less risky than stocks. […]

rayhanas
Guest

Advertise more, not many people know of your company and how easy it is to get a loan with a great rate for a low price.
private mortgage lending victoria

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[…] investors to lend money to subprime borrowers. They charge high interest rates on their mortgages, typically in the range of 9% to 12%. MICs typically pass on to their investors the vast majority of the interest earned, and the rest […]

Al
Guest
Al

I’ve got 250K in private mortgages. Thus far haven’t lost a dime or had a single missed payment (thank god). It’s turned out to be a pretty good investment for me thus far.

MIC Research
Guest
MIC Research

What companies are you invested in? and for how long?

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[…] interest payments with unit price changes to obtain the total returns. As for the private MIC, Antrim Balanced Mortgage Fund, I started the year with a portfolio value of roughly $10,300. As we can see from my account […]

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[…] earlier this month I added $7K to my Antrim Mortgage investment, bringing my total account balance for this one investment to $17,913. I had to dip into my Line of […]

Dividend Earner
Guest

Do you have an update 2 years later on the investment?

J-Bone
Guest
J-Bone

Do you feel there is more risk in BC MIC’s now that the greater Vancouver real estate market started slowing down from an overheated year?

Liquid
Admin

Yes. Sales are already slowing down. But so far prices have managed to remain high. The immediate risk right now is that less buyers will look for financing which could reduce business for lenders such as MICs. This would translate to lower investor returns maybe in the 3% or 4% range instead of 6% to 8% annual returns we’re experiencing today. But it’s unlikely that MIC funds will actually lose money since they have ongoing portfolios earning high interest rates and are profitable. Even if a borrower defaults on its debt payments a MIC can just sell the property secured by the loan to recuperate the money. Most MICs have loan-to-value ratios of 70% or higher.

If the real estate market gets worse like if delinquency rates for real estate loans increase dramatically or if actual property values drop by 20% across the lower mainland then there will be greater risk that MIC investors could lose money. This could happen maybe in the next couple of years, but so far it’s not an immediate risk to investors right now.

J-Bone
Guest
J-Bone

Yes exactly, it would take a 20-30% reduction in real estate plus people would have to walk away from their homes for it to start affecting the MIC. So your opinion is it is still a good time to invest in a MIC despite the current climate here in the lower mainland?

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[…] have a Canadian Western TFSA. All the money here is invested in Antrim MIC, and has returned about 6% per […]

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