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.
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!
What Does a Mortgage Investment Corporation do Exactly?
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.
- Westboro Mortgages
- Timbercreek (TMC)
- Trez capital (TZZ)
- Firm Capital (FC)
- MCAN Mortgage Corp.
- Canadian Horizons
- Atrium (AI)
- 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.
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.
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 🙂
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]
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?
Great catch. Way to read between the lines 🙂 Canada is not immune to a real estate correction. We are very exposed to global shocks. When Jane Knop compared the two figures in her interview I knew that even if the numbers were right, there was something fishy about the way she presented them. Now I realize the comparison is a bit misleading because she’s comparing the rate of all bond defaults to all mortgage defaults, but in reality MICs only represent a small portion of the mortgage lending industry, which also happens to be the most risky portion. It’s like saying the chance for a publicly traded company to go bankrupt is pretty low, so let’s buy some penny stocks lol.
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.
That’s my concern as well. I’m sure we’ll be okay as long as week keep a diversified portfolio. Sorry, but MICs don’t exist in the U.S. However, there are equivalent mortgage-backed securities Americans can buy 🙂 I’ve heard investors can buy some Collateralized Mortgage Obligations (CMOs) and pass-through securities which are basicly mortgage-backed bonds. I have not done much research on the mortgage lending industry in the U.S. but I’m sure options exist. Due to the real estate correction in 2007 in the U.S. many people may feel mortgages are too risky, so investors may have to do some digging around to find relevant information. Of course, anyone in the world can buy publicly traded MICs in Canada, but they just have to be careful about how foreign profits are taxed in their country. One advantage you guys have down there is access to P2P lending like Prosper or Lending Club. I have American friends who are making 7% a year easily with their P2P investments 🙂
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!
Yes, I’m a bit anxious that the small spread is not enough to justify the risk or hassle. The expected upside is only an extra $150 per year lol (3% x $5,000) We’ll see how it goes the first year. If things continue the way they are I will keep the leverage, if not, I’ll pay back the $5K. The nice thing about inflation is it’s a double edged blade. The $5K I owe to the bank will lose value over time at the exact same rate as the $5K I have invested in the MIC. The 2 cancel each other out haha. The only real impact inflation will have is on the 3% spread. Oh well, can’t do much about that 😕 As you already know currencies can be manipulated easily and it can have disastrous effects on the economy. Hopefully Canada is smart and doesn’t try to manipulate our currency to the same extent that the U.S. has done with theirs, but if we do see some kind of run away inflation up here at least our debts will be easier to pay off, hopefully 🙂
I hope the investment works out for you!
Taxes need to fit in that equation somehow too… – Cheers.
My bad… TFSA account is being used…
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.
No reason in particular. Ideally I would like to diversify my MIC exposure and own both private as well as public MICs. With a private MIC the disadvantage is a higher risk of fraud like you mentioned. With publicly traded MICs there are headwinds like extra expenses such as the ongoing cost of continuing to be listed on the TSX, and there could be external pressure on management to please shareholders. It’s like buying something on Craigslist instead of from a reputable business. Both are licensed and qualified to provide the same service. The service found on Craigslist has a higher chance of not being reliable, but it’s often cheaper, and there is less red tape. They think like their clients and don’t want to give money to regulators and authorities if they don’t have to, so they can save more money for themselves and their customers. The other thing with public MICs is their stock price fluctuates with the market, which kind of puts them in a grey area of asset class in between fixed income and equities. But with a private MIC an investor’s money can be redeemed without losing any principle (in most cases.) But the problem… Read more »
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
Welcome to Canada 🙂 Learning how to invest is one of the best education you can give yourself. Happy reading. You will be a pro in no time :0)
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.
The reason I was looking into this was because I had less than 5% fixed income and wanted to have a more balanced nest egg. MICs just seem like the right fit. Glad I’m not a loan in thinking that they’re a great addition to one’s fixed income portfolio. Many Canadians invest in real estate on the equity side and own property. But another way to invest is through debt, by buying up mortgages. The benefit is a 10% or 20% real estate correction should not affect an investor’s principle in a MIC. But for people who own properties, they will see their assets fall in value. Overall I think the best way is to have both equities as well as debt investments 😀
MIC is one of the Exempt Market products in Canada. EMP products, in general, has no guarantee. However, MIC in Canada was originated back in 1971, most successful companies have proven record of its much better rate of return than general bank products, and satisfied investors by distributing quarterly dividend, we can also hold in TSFA. It is a great investment engine to diversity our portfolios.
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.
I have some online friends in Estonia and Finland who also blogs about personal finance. I think I was browsing through one of their sites the other day and came across your blog by clicking a link by accident or something lol. That’s really cool how you guys all write perfect English, and still know at least one other language fluently. In Canada it’s less common to find people who are multilingual. Thanks for the great idea on making your own bread 🙂 My friend has a bread maker and it’s a great investment because it saves her a lot of money.
Yes, it’s a mix of first and second mortgages usually but you can choose MICs that are only first mortgages. Fisgard is one example. Investors can expect 5%-6% a year from them in a low interest rate environment. The mortgages they lend out tend to default less, which saves costs on legal and other foreclosure fees. Unless there’s a catastrophic property crash, MICs should not lose any principle for their investors 🙂 Only the interest paid out (investment returns) might change from year to year.
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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.
Good to hear. 🙂
What companies are you invested in? and for how long?
[…] 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 […]
[…] 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 […]
Do you have an update 2 years later on the investment?
I have an update from earlier this year. Basically my annual return in 2015 from this fund was 4.5%. And overall my entire MIC holdings returned 4.1%. You can find more details here: https://www.freedomthirtyfiveblog.com/2016/02/mortgage-investment-performance.html
I also put in an additional $7,000 into this particular fund. Combined with my initial $10,000 as mentioned in this post, my total investment is $17,000. My balance right now is about $18,300 in the account, which means over the last 2 years I’ve made $1,300, which is about 5% return per year.
Here’s the post detailing my $7,000 contribution earlier this year https://www.freedomthirtyfiveblog.com/2016/03/increasing-defensive-holdings.html.
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?
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.
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?
I don’t know if this is a good time to invest in MICs, but I think having a balanced portfolio is important. If an investor doesn’t already have exposure to real estate then using MICs is a good way to get into this sector. REITs are also a good alternative if one prefers to invest in equity over debt.
[…] have a Canadian Western TFSA. All the money here is invested in Antrim MIC, and has returned about 6% per […]
Do I need to be an accreddited investor?
Not if you want to invest in publicly traded MICs. But most private MICs require you to have either a high net worth or high income.
[…] Related Post: What are Mortgage Investment Corps? […]
I wanted to share what I’ve learned. First off, when doing due diligence, I’d find out how long has the MIC been in existence, and how much of an investment has the manager(s) made in the fund. I like them to have some skin in the game. I’m still investing significantly in private MICs, but I’ve lost my entire investment in 2 of the private MICs I’ve invested in – I call this education cost. One fraud, and the other poor/inexperienced management. Now I look at the age of the company before getting seduced into the possibility of higher returns (look up Crossroads DMD that was highlighted above…). I’ve also followed a few publicly traded MICs (MCAN and Atrium) that seem to be pretty solid. What I’ve learned is to research heavily, and spread your money around so that one poor management team can’t hurt you as much. These can be risky investments, but I’ve still invested a lot in these – in spite of my financial planner’s advice. My favourite private MICs are all in BC, and have been around for at least 20 years. FYI: Capital Direct and Alpine Credits have their own MICs. Do your research! And… Read more »
Great advice, John. Looking at the age of the company is also an important factor for me. I feel almost too exposed with having $20K in one MIC. But I don’t want to take it out now because I’ve been happy with the performance so far.
[…] rate hedging. 🙂 For example, below is a part of an email I received last week from one of the private mortgage funds I’m invested […]
Its such an amazing post. Thanks for sharing.
Yeah have anyone of u considered risks of earthquake and or Tsnami investing in BC property and what it could do to these portfolios – what do u think?
Natural disasters are hard to predict but you can use insurance to cover the risk. Large earthquakes are rare, even around the west coast, but I believe most buildings in Vancouver today can withstand the tremors. Most BC properties have earthquake insurance so any damage or cost will be mostly covered under the insurance policy. Tsunamis can be a major risk as well, but there’s a large piece of land (Vancouver Island) west of the greater Vancouver area. The island is 100 Km wide and full of tall trees, so it should stop any large waves coming from the pacific ocean. So as long as you don’t own real estate on the west side of the island you should be okay.
There have been 2 large earthquakes around Vancouver in the 1940s. They had a magnitude of 7.5 and 8, so they were quite strong. There were only a couple of deaths caused by those earthquakes. I don’t believe it affected the housing market much because I read a Globe and Mail article saying Canadian housing prices went up in the 40s and 50s. It didn’t mention BC specifically but I don’t see why it would be different here.
[…] Corporations, which can be publicly traded or private. In the past I’ve blogged about which ones I like and hold. Currently popular MICs such as Timbercreek and Atrium have yields around 8%. Disclaimer: I […]
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