Real estate investments such as mortgage investment corporations (MIC) and syndicated mortgages are one way for clients to diversify their portfolios outside of traditional stocks and bonds. Yet, much like house hunting, finding the right investment requires research, hitting the pavement and probably taking a peek in the attic.
A MIC is an investment portfolio consisting of a number of mortgages — 50% of which must be residential. Distributions received from a MIC are treated as interest for tax purposes. Most MICs are private but some, such as Timbercreek Mortgage Investment Co. and Trez Capital Mortgage Investment Corp., are traded publically on the Toronto Stock Exchange.
Retail clients can invest in a private MIC through an offering memorandum (OM) in most provinces. Until recently, the notable exception was Ontario, where investors had to be accredited to access MICs. However, in October the Ontario Securities Commission (OSC) introduced an OM exemption, which is set to take effect in 2016.
Adam Rose, managing director with Toronto-based Morrison Laurier Mortgage Corp., sees these investments as being appealing to investors who are perhaps leery of stock market volatility.
“Private MICs are non-correlated to any market, either stock or bond,” says Rose, “[and should be considered by] investors who might be transitioning from growth to income and people who want a balanced portfolio right from the get go.”
Each MIC is slightly different from the other, although they can be divided into two broad categories, according to Craig Skauge, president of the Calgary-based National Exempt Market Association (NEMA). One category includes MICs that provide mortgages to individuals who are looking to purchase a family home but are unable to get financing from the banks. The other category includes MICs that focus on lending to construction companies.
In some cases, a MIC may do a combination of the two forms of lending, adds Skauge, although they typically specialize in either one or the other.
Other details advisors need to make sure they (and their clients) know and understand before selecting a MIC in which to invest include:
- Does the MIC hold first, second or third mortgages?
- What is the geographic area of the mortgages? Is it a small town or large city?
- What is the fee structure?
- Are the quoted returns absolute or risk-adjusted?
- What is the diversification and average deal size held in the MIC?
- What is the MIC’s track record?
- Does the MIC have a strong management team?
Advisors can find answers to these questions by doing a little research online and by speaking with the management team of the corporation directly. Other resources advisors can use to find out more about these alternative investments include the Canadian Association of Accredited Mortgage Professionals (CAAMP) and regional organizations such as the B.C. MIC Managers Association (BCMMA).
Another real estate investment option is a syndicated mortgage. These investments are mortgages held by two or more private investors, with returns negotiated by the participants.
A syndicated mortgage could be as simple as two people lending money to a third to buy a personal home, or it could be a more complex matter involving hundreds of individuals investing in a large project, such as a condominium. The latter format is sometimes referred to as a pooled mortgage investment.
Syndicated mortgages are investments in a single project, meaning that they are not as diversified as a MIC and are potentially riskier.
Recently, the Toronto-based Financial Services Commission of Ontario (FSCO) revamped its required mortgage disclosure forms in an effort to help investors understand syndicated mortgages and the risks associated with these investments.
The new documents highlight important information for potential investors to be aware of before making an investment, says Mal Eccles, a mortgage broker with London, Ont.-based CIR Mortgage Corp. and director of the Independent Mortgage Brokers Association of Ontario. For example, the new documents state that syndicated mortgages carry default risks as well as risks regarding the financing of real estate transactions. The form also says “inexperienced investors are not advised to enter into mortgage investments.”
Besides the risks, advisors also need to make sure they understand the licensing and regulatory requirements associated with these investments. Under the Mortgage Brokerages, Lenders and Administrators Act, only a licensed mortgage broker can offer syndicated mortgages to investors.
Furthermore, should an advisor licensed by the Toronto-based Mutual Fund Dealers Association of Canada be dual-licensed as a mortgage broker, all mortgage business must be conducted through his or her dealer — meaning the mutual fund dealer must also be licensed as a mortgage brokerage.
Similarly, advisors licensed under the Toronto-based Investment Industry Regulatory Organization of Canada must report such business under the regulator’s “outside business activities” rules.
Managing general agencies (MGAs), on the other hand, each have their own rules as to whether or not dual-licensed advisors must inform the MGA of any business involving mortgage investments.