A mortgage investment corporation, or MIC, is a uniquely Canadian business structure that enables accredited and non-individuals to invest in pools of mortgages. It offers investors practical access to the Canadian real estate markets by leveraging economies of scale not available to individuals directly.
MICs may also borrow from banks to supplement shareholders’ capital. The combined pool is invested in a portfolio of mortgages backed by carefully chosen real estate properties. MICs receive streams of mortgage payments from borrowers, which are then distributed as income to investors on a monthly or quarterly basis.
One way to think of a MIC is that it’s akin to a mutual fund that invests in mortgages, rather than stocks or bonds. Critically, as outlined in Canadian tax law, a MIC must distribute all its income to investors as a flow-through dividend.
While this dividend is taxed as interest income, Section 130.1 of the Income Tax Act calls for the MIC itself to be considered as a tax-exempt corporation, providing further benefit to investors.
Canadian real estate market
We believe that Canada may be the ideal country to have originated the MIC, and we are optimistic about residential real estate demand continuing to remain strong due to:
Canada was notably almost untouched by the 2008 subprime debacle that devastated real estate markets in other parts of the world. Kevin G. Lynch, then vice-chair, BMO Financial Group, and a former Clerk of the Privy Council, observed in 2011:
While Canada was hit by the worldwide recession, the Canadian financial system weathered the global financial crisis relatively well. Canadian financial institutions were not unscathed by the financial crisis, but none was excessively impacted by toxic assets, no public funds were injected into financial institutions, Canadian banks remained profitable and dividend-paying and, importantly, they continued to lend.
Consider MICs as part of a real estate investing strategy
There are four primary ways for individuals to invest in real estate:
The decision to invest in one or more of these buckets is largely a function of investors’ objectives and time horizons for achieving growth vs. income, their tax situation, and their appetite for risk. While we will discuss the specific differences in another post, here are some high-level distinctions among them.
Those seeking long-term growth investments may naturally gravitate toward direct ownership of property (which can also generate rental income) or a real estate limited partnership, or RELP.
A RELP typically pools investor funds to develop a property from the ground up or to renovate and sell an existing one. RELPs do not generally offer regular distributions and are usually illiquid, so the returns, while they can be high, are not guaranteed and generally come only after a period of time.
Those seeking income as part of their real estate and overall portfolio should consider REITs and MICs. REITs typically pay investors regular distributions from rent contributions and can also develop and renovate property, REIT investors may enjoy increased distributions after a property is renovated and repositioned at a higher value. Among the risks of a REIT are that tenants may be unable to meet their rent and lease obligations, and a property or development may not be able to be profitably sold, either of which would directly affect investor distributions.
Advantages of investing in MICs
Canada’s MIC initiative has proven itself over some five decades, and MICs are designed to provide portfolio diversification with risks that are mitigated compared to other real estate investments. Additionally, MICs provide a more predictable return in a vehicle that is accessible to a broad swath of investors.
MICs invest in mortgages on real property. Unlike a REIT, whose distributions rely heavily on rent payments and market fluctuations, a MIC receives interest on the mortgages in its portfolio. The mortgagor is still required to pay the interest and ultimately the principal of the loan regardless of the state of the real estate market, and whether or not any tenant in that property is paying rent and whether or not a property retains its value.
In any case, the loan and the predetermined monthly interest must be paid. As a generality, the loan to value ratio, or LTV, of a mortgage is a maximum of 80%. In other words, the value of property is always at least 25% more than the mortgage at the time of funding, a helpful cushion in the event of the rare foreclosure. This is a margin of safety unavailable in a REIT’s structure.
A MIC’s portfolio can include first or subordinate mortgages on single-family homes or on a residential apartment. The mortgages themselves are secured on real property, often in conjunction with other forms of security, such as personal and corporate guarantees, general security agreements and assignments of rent.
While an investment in a MIC does not increase in value, since the mortgage is for a fixed sum, a MIC provides a source of income of a known amount based on a fixed or targeted rate of return.
Average returns of REITs and MICs are comparable at between 6% to 10%, although REIT returns tend to be at the higher end of this range to reflect the increased risk.
In summary, a MIC is an option for people in search of a steady income in the form of regular distributions.