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6 Truly Passive Investments for Sophisticated Investors in Canada

24 July 2019

Wouldn’t it be nice to wake up late and have breakfast in a posh resort, sipping coffee and enjoying the cool sea breeze gently blowing against the newspaper you’re reading? And all the while, your passive income is streaming into your account?

If you are planning to park your money productively, learning how to invest in real estate through passive income opportunities can help bring that dream closer.

While average investors can select from many investment opportunities found in stocks, bonds, and exchange-traded funds or ETFs to spread and build their wealth, savvier investors, are putting their money into broader and more significant opportunities.

These alternative investments are gaining popularity as sophisticated investors and even pension funds are allocating money to what they call passive-income vessels.

1. Peer to Peer Lending (P2P)

Effective since January of 2018, the majority of Canadian banks issued tighter rules when it comes to getting a new loan, renewal, or refinancing mortgages. Governor Stephen Poloz said that the Bank of Canada would continue to gradually increase interest rates until the economy is stable. These amended mortgage rules and high interest rates have resulted in the financial strain on individuals who are now finding difficulty in acquiring financing.

However, this is also an excellent time for sophisticated investors to lend a helping hand. Peer-to-peer lending allows borrowers to take mortgages for business capital, home improvements, or the payment of utilities from private investors who are willing to loan their money as long as there is an agreed-upon interest rate.

With its looser qualification criteria and faster processing, P2P lending is gradually becoming recognized in Canada. Becoming a P2P investor has a lot of advantages if you are searching for diversification. You can decide how much to finance per loan, and you can spread the risk between borrowers. Returns are more significant ranging from 5 to 9% without putting too much effort into the process.

The global outlook for P2P lending projects strong growth, with numbers expected to rise until 2025.

2. Real Estate Investment Trusts (REITs)

Real estate does not move in unison with stock markets, providing yet another reason for sophisticated investors to diversify their holdings through real estate funds. Real estate investment trusts or REITs provide investors with diversification apart from equity-type stocks and bonds. They also generate modest yields—the reason most high-income investors are turning to REITs as a passive income source.

While real estate experts like Don Campbell may advise real estate investors to become actively involved in acquiring and managing their investment, many alternative investment strategies in real estate abound, allowing investors to reap the rewards without breaking a sweat.

3. Venture Capital

Another alternative real estate passive income stream for sophisticated investors involves participating in venture capital. Most VC funds are held with Canadian limited partnerships that focus on funding businesses at any stage of the business lifecycle: seed stage, growth stage, and mature stage.

VC creates an opportunity for small and medium businesses to grow and have greater opportunities. According to retrospective data published in 2019, there were about 1.17 million SMEs as of December 2017, most of which were concentrated in Ontario and Quebec. Venture capital firms charge these types of companies a higher interest rate compared to other types of lenders.

High-net-worth investors can commit their capital to a venture capital firm, but again, it’s crucial to find one with solid management and a proven track record.

4. Hedge Funds

Hedge funds are typically limited to accredited investors with significant net worth. Hedge funds invest in practically any business that the fund manager reviews in painstaking detail.

They are primarily structured as limited partnerships, usually with investors and the managing partner, where the latter gets paid with the necessary management fee and profit percentage based on the agreement. If you are considering this avenue, make sure to look for funds where the management has an advantage that is not correlated to the market.

Canada’s hedge funds continue to evolve faster to satisfy dynamic client demands and expectations.

5. Private Equity

Like hedge funds, private equity is typically restricted to high-net-worth individuals. Private equity funds invest directly in businesses—mainly by buying private companies—but in many cases, they attempt to acquire shares in publicly traded companies.

As private equity typically aims for longer-term benefits, it usually requires investors to park their money for a minimum period that is determined by the management contract. This can typically range from 3 to 5 years.

According to a survey of both Canadian and U.S. private equity executives, the top areas for investment in Canada include consumer goods with a 24% market share, industrials and chemicals with 22%, oil and gas with 14%, and technology with 14%.

6. Mortgage Investment Corporations

Think of a Mortgage Investment Corporation (MIC) as a peer-to-peer lending platform for real estate. A typical P2P lending platform allows investors to lend money to others; the lender and the borrower are matched using online services. Lenders can look through various candidate profiles and decide whom to approve for a loan. In a sense, this is what your banker would do when assessing individuals for a mortgage; they underwrite each mortgage through their regimented rules and parameters.

When investing through a MIC, all the mortgage sourcing and mortgage underwriting have already been completed. An investor is hedging their risk when investing through a MIC, as they are entrusting their investment capital to an expert team that has extensive experience in every facet of the mortgage lending business.

Be diligent

Diversification is a crucial element for sophisticated investors but it’s equally important to do your homework when it comes to choosing the right firm that will take care of your capital and build your wealth.

While investments come with their share of risk, partnering with the right investment professional can mitigate that risk and open the door to the multiple streams of passive income available through real estate.

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