Real estate investments such as mortgage investment corporations (MIC) and syndicated mortgages are an effective way for investors to diversify outside of traditional stocks and bonds. Like any investment decision, it is important to understand the investment opportunity, and in this publication we will explore the difference between MICs and syndicated mortgages.
A MIC is a fund; a pooled investment vehicle, structured as a corporation. Investors purchase shares of the corporation. The corporation uses the funds to issue mortgages and earn interest income. Investors receive 100% of the net income of the corporation, distributed to each investor on the basis of their proportional ownership of shares.
This method of investing does not involve a fund or corporate structure. Rather, it involves two or more individuals coming together to negotiate the terms of a mortgage. One side is the lender and the other side is the borrower. For the lender (i.e. the investor), it is a venture in a single loan, which means there is no diversification like there would be in a pooled fund or MIC and therefore potentially riskier. The lender is 100% exposed to a single loan and assumes all the risks, including default risk, transactional risk, legal and regulatory risk. Under the Mortgage Brokerages, Lenders and Administrators Act, only a licensed mortgage broker can offer syndicated mortgages to investors.
|Diversification Risk||Higher risk due to concentration in one loan (no diversification)||Offers diversification, investors are not exposed to a single loan, thereby reducing risk.|
|Track Record||Reliance on reputation of mortgage broker||Offers greater transparency via audited track record of fund, in addition to reputation of mortgage broker and fund management team.|
|Liquidity||Not liquid, the investor has contracted to the term of the mortgage and is therefore locked in.||Offers liquidity, a MIC is an open-end fund with allowable exits. Most private MICs offer exits with 90 days notice. Public MICs can be liquidated on the open market.|
|Investment Return||Investor only earns income over the term of the loan and is not earning interest between deals.||Investors earn income continuously, as long as their money is in the MIC. The fund manager manages deal flow on behalf of the investor.|
|Audit Assurance||No audit requirement||Audited financial statements required annually & shared with investors.|
|RRSP & TFSA Eligibility||Only eligible through the cooperation of a third party Trustee||MICs are RRSP & TFSA eligible|
|Regulator||Financial Services Regulatory Authority of Ontario (FSRA)||FSRA & Ontario Securities Commission (or other provincial securities regulator if outside Ontario)|