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]