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The Anatomy of a Great Real Estate Investment Fund

8 July 2019

There are multiple drivers behind the performance and security of a fund. While collecting rent continues to be the primary source of revenue for REITs, they grow internally through occupancy, rent increases, tenant upgrades, and redevelopment of existing properties. REITs also have the benefit of capital growth through the underlying real-estates appreciating in value over time.

Mortgage Investment Corporations (MICs) tend to have a more manageable and less volatile form of revenue origination—monthly mortgage payments. However, the security of a MIC is underpinned by various factors that play a role in the overall performance of the fund.

Ways to Invest in Real Estate

The industry has matured into a more stable, liquid, and transparent group. There are so many ways to invest in real estate in Canada, and one of the most appealing is through real estate investment funds. One notable way investors are participating is through MICs or mortgage investment corporations. You don’t need a large sum of money to participate or a significant amount of time invested to reap the rewards.

One of the common misconceptions surrounding real estate investment is the notion of having to own and operate the physical property to be considered a property investor. However, you will find that there are plenty of ways to invest in real estate that can generate similar levels of income.

  • Direct Ownership (Apartments, Retail, Commercial, Industrial etc.)
  • REITs (A that owns and manages a collection of properties where investors can park and grow their money)
  • MICs (The income is derived from mortgages on a pool different properties)
  • Private Investments (Crowdfunding, Private lending, Joint ventures)

The Rise of Mortgage Investment Corporations

MICs have been seeing dramatic growth over the last several years as investors search for return and capital preservation. According to a recent report by the Bank of Canada (Residential Mortgage Market in Canada – A Primer- Financial System Review), alternative sources of capital including MICs make up approximately 2.6% of the residential mortgage debt outstanding in Canada.

According to the year-end economic report from the Bank of Canada, mortgages issued by private lenders are increasing, especially in the Toronto area. The rise was noted with the challenging implementation of the mortgage stress test. Increased government scrutiny has led both brokers and borrowers to search for alternative lending means.

With an increasing number of Canadians running out of financing options, alternative lenders like CMI MIC provide a lifeline for borrowers while increasing opportunities for participating investors. Approximately 54% of outstanding residential mortgages were uninsured in the fourth quarter of 2018, up from 49% in Q4 of 2017. According to research from CIBC last year, MICs are likely to continue eating up an increasing number of transaction volume in Canada.

Examining MICs

MICs provide businesses, individuals, and institutions better ways to invest in the Canadian real estate market. These private funds gather investors’ money and lend mortgages to individuals and generate their revenue from the mortgage interest paid by the borrower.

When evaluating a real estate investment fund it is important to review the specific housing markets, types of mortgages and asset classes (i.e. single-family, multi-family, residential, commercial) that make up the investment. An investor would then use their market findings to evaluate the MIC’s lending policies against their appetite for risk and reward.

Stability and capital preservation are the basis of a sound investment strategy. The CMI MIC has been able to strike a balance between cash-in and cash-out while providing it’s shareholders strong yields supported by secure assets through sound management practices.

Quick Guide to Selecting the Right MIC

Whether an investor’s strategy is wealth accumulation or wealth preservation, a MIC can be a key piece in their portfolio. The advantages of investing in a MIC are numerous but selecting the right MIC for you is not as simple as comparing the rates of ROI.

Consider the following additional evaluation methods:

  1. When and how are dividends distributed to shareholders?
    Not all MICs issue dividends on the same schedule (monthly, quarterly, annually).
  2. How often does the MIC report to shareholders on portfolio performance?
    Are performance reports readily available and released on a regular basis?
  3. Which housing markets are being invested in and what types of mortgages your money is being lent out to.
    Review the housing sectors as well as the geographic regions comprising the portfolio.
  4. How do the redemption periods work if you need to withdraw your investment?
    Review the subscription agreement to understand this policy in detail.
  5. Is the MIC’s ROI steadily increasing and showing stability or is it fluctuating?
    Look for a MIC that has stability in their annual ROI.

Management Team

The management of a MIC plays an essential part in the success of all its mortgage investments. First and foremost, their vision should be aligned with that of their investors. The fund manager oversees the operations of a MIC including the mortgage selection process, involvement with the underwriting team, determining funding guidelines, reviewing market opportunities and coordinating legal and operations teams.

Dividend Pay-Outs

Dividend payments vary from MIC to MIC and are stipulated in the offering documents. Payouts are either monthly, quarterly or annually. Solid performing MICs are consistent in the number of dividends paid to their investors without any delays or missed payments.

The returns on your MIC investment can be amplified if the MIC offers a DRIP program allowing participating investors to earn compounded interest through reinvesting.
How to Invest in a MIC
Investors investing in a Mortgage Investment Corporation (MIC) start earning dividends immediately after purchasing shares and signing an offering certificate containing the terms and conditions including the rights and expectations of both the investor and the mortgage company. Canada’s securities commissions regulate the MIC industry, and all MICs must follow the guidelines governing the MIC industry.

MICs must go through different levels of qualifications to ensure that they adhere to the rules and regulations set by the governing body. While MICs may resemble or be confused with REITs, they strictly focus on the mortgage market and do not hold any property.

The Yield

At CMI, we believe that due diligence is both an art and a science. We spend a considerable amount of time identifying investment opportunities that meet our rigorous standards. We then spend even more time trying to determine the “story behind the numbers” and whether the opportunity fits our growing portfolio.

CMI’s objectives are to provide its MIC shareholders with stable and secure dividends and preserve shareholders’ equity by lending within conservative risk parameters.

Contact Us

Contact us for more information on our MIC funds or to book an appointment with one of our Investment Professionals.

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