Investing in modern times seems like it should be easy, but traditional growth strategies that worked in the past are no longer sufficient in today’s volatile world. Even legendary investor Charlie Munger, who had a net worth of $2.6 billion when he passed away, believed investing became “much harder” over his lifetime. Today, an investor with $50,000 to invest doesn’t have the same strategies for allocating their capital productively.
Against this backdrop, sophisticated investors have been increasing their exposure to alternative assets, which are a broad category of financial instruments that don’t fall into the conventional categories of stocks, bonds, or cash. In Canada, Mortgage Investment Corporations (MICs) are one of the fastest-growing alternative assets, playing a key role in the country’s mortgage and investment landscape. In the following article, we will explore how investing in MICs can be a strategic move for enhancing returns and improving portfolio diversification.
Understanding MICs
A MIC is a registered investment fund that pools capital from investors to invest in private mortgages. It operates like a mutual fund or exchange-traded fund, but instead of stocks and bonds, it invests in a portfolio of commercial and/or residential mortgages that produces income by collecting interest and fees from borrowers. Investors are preferred shareholders of the fund and are entitled to regular dividend payments.
By investing in a MIC, investors gain direct access to Canada’s private mortgage markets without significant upfront costs or the typical risks associated with real estate investments. MICs invest in mortgages, not real estate, and are managed by an investment corporation that oversees the entire investment process, from mortgage selection to adjudication and management.
MICs have accumulated billions of dollars in capital to meet the growing demand for private mortgages in Canada. As a pool of capital, MICs lend funds to borrowers who need short-term financing, usually in the form of first and second mortgages. However, a MIC portfolio can include everything from small residential mortgages to commercial and development mortgages for larger projects.
In Canada, MICs enjoy special tax treatment under the Income Tax Act, where they’re classified as “flow-through” investment vehicles. This means MICs can avoid paying taxes by distributing 100% of their net income to shareholders. These dividend distributions are taxed in the hands of investors as interest income. Each MIC requires at least 20 shareholders, with no individual shareholder owning more than 25% of the outstanding shares.
The Appeal of MIC Investments
A MIC is an attractive option for investors because their capital is put to productive use. Unlike traditional banks and credit unions, which are bound by stringent federal regulations, a MIC can set its own criteria for lending out its capital.
Because MICs are willing to extend mortgages to borrowers who are deemed higher risk, so long as they adhere to the fund’s risk parameters and lending guidelines, they can charge higher fees and interest. The most successful MICs have targeted returns that typically range from 6% to 11% annually, depending on the composition and objectives of the fund
A MIC is a passive investment strategy that provides investors with regular dividend payments that can be withdrawn for income or reinvested for compound growth. The leading MICs offer Dividend Reinvestment Plans (DRIP), which enable investors to reinvest their dividend capital into additional shares or fractional shares of the fund, rather than receiving their distributions in cash.
When part of a broader portfolio of stocks, bonds, and other alternative assets, a MIC provides strong diversification benefits because its returns are non-correlated with public markets. The leading MIC funds invest in a pool of diversified mortgages that spread the risk across different loan types, borrowers, and regions, thereby reducing the overall risk for the shareholder.
In addition to its tax-efficient structure, a mortgage investment corporation can create regular cash flow in registered accounts, such as a Tax-Free Savings Account (TFSA) or Registered Retirement Plan (RRSP), thereby eliminating or deferring tax payments until retirement. MICs are also Registered Education Savings Plan (RESP), Registered Disability Savings Plan (RDSP), Registered Retirement Income Fund (RRIF), and Locked-In Retirement Account (LIRA) eligible.
From a tax perspective, dividend earnings from a MIC investment are treated just as any other asset within a registered fund. In a TFSA, dividend payments can be withdrawn at any time without tax penalties. For RRSPs, dividend earnings are tax-deferred until retirement, when withdrawals usually begin.
Investing in MICs with $50,000
Although MIC investing isn’t as capital intensive as other forms of private mortgage investing, investors should begin by identifying their goals and risk tolerance. From there, they can start building their investment plan.
Before making an investment decision, investors should research the top Mortgage Investment Corporations in Canada, focusing on their reputation, innovative fund offerings, regional or national footprint, and history in the private mortgage market. Mortgage Investment Corporations typically offer several funds that are aligned to various risk profiles and investment horizons, from ultra-defensive to high yield. To make an informed decision, investors should carefully review MIC fact sheets to learn about each fund’s investment objectives, financial summary, and portfolio composition.
Most mortgage investment corporations require a minimum investment of $5,000 to start. An investor looking to allocate $50,000 can invest all at once or start small and invest into a fund over time. Investors can mitigate their risks by investing in highly diversified MICs with an established record of reaching their targeted annual returns. A corporation’s reputation and track record are important because MICs are passive investments, which means the corporation will be managing the entire investment process on your behalf.
Maximizing Your MIC Investment
When it comes to maximizing your MIC investment, there’s no substitute for research and due diligence. When evaluating MIC funds, it’s important to assess the following indicators:
- Fund details (fund type, redemption schedule, management fee, assets under management, registered plan eligibility)
- Fund summary (mortgage investments, invested capital, cash equivalents)
- Portfolio composition (average loan size, number of loans, weighted average loan-to-value ratio)
- Assets under management (year-over-year growth)
- Historical performance (annual returns and returns since inception)
- Portfolio diversification (mortgage allocation, security position, geographic breakdown)
These details should be provided by the corporation and updated monthly, which should help you monitor the fund’s performance.
As mentioned earlier, one of the best ways to maximize your MIC investment is to reinvest your dividends. When employed properly, a dividend reinvestment strategy can compound your returns over time by enabling you to acquire additional MIC shares at a lower cost. Dividend reinvestment is suitable for long-term investment strategies.
The Future of MIC Investing in Canada
As more borrowers are excluded from conventional lending due to heightened regulations, Canada’s private mortgage market continues to grow. According to the Canada Mortgage and Housing Corporation (CMHC), the share of new mortgages extended by private lenders has grown sharply since the pandemic. By early 2023, 8% of new mortgages in Canada were financed by private lenders, up from 5.3% in 2021. As CMHC noted, mortgage investment corporations are playing a leading role in the growth of non-bank lending.
With the federal government continuing to tinker with the residential mortgage market, more borrowers are seeking alternative lenders for their financing needs. All indications suggest that MIC investors will be there to fill the gap. Demand for alternative lending solutions is expected to remain strong even as the Bank of Canada opens the door to interest rate cuts in 2024. That’s because, regardless of interest rates, more than one-third of traditional financial institutions have tightened their mortgage lending requirements recently, according to the Financial Post.
Conclusion
Thanks to their income generation, portfolio diversification, and unique tax advantages, Mortgage Investment Corporations can be a strategic decision for Canadian investors. A $50,000 investment in a MIC with the power of a dividend reinvestment strategy can help investors maximize their returns and reach their investment goals faster.
It’s important to conduct thorough research and consider personal financial goals before making any investment decision. CMI Financial Group has simplified this process by offering CMI MIC Funds, which have been engineered to deliver risk-adjusted returns based on specific investor risk profiles: conservative, moderate (balanced), and more aggressive.
Since its inception, CMI Financial Group has facilitated more than $2.5 billion in successful mortgage placements across Canada. Our CMI MIC Funds are designed to provide direct, barrier-free entry into Canada’s mortgage market, based entirely on each investor’s risk tolerance. If you have questions about CMI MIC Funds or want to get started, contact a CMI Investment Professional to learn more.
