Fixed Income Mortgage Investment Corporation in Canada
Capital Preservation. Monthly Interest Income. Low Volatility
Discover how Mortgage Investment Corporations (MICs) can help you preserve your capital whilst giving you fixed monthly dividend income.
Video courtesy of RiverRock MIC.
Mortgage Investment Corporations are alternative investments suitable for enhancing your investment returns with less market risk & volatility. Our preferred partner is RiverRock MIC.
WHY INVEST IN A MIC?
What is a Mortgage Investment Corporation (MIC)?
A MIC is a type of alternative investment vehicle in Canada that pools the capital of private investors and uses that capital to invest in private mortgages in Canada, creating an alternative fixed-income investment. This has two benefits: it increases the flow of money available for the MIC to fund mortgages and provides a way for smaller investors to participate in the residential real estate market. As less regulated lenders, MICs are not subject to the new, more stringent, lending criteria.
3 benefits of MICs to your portfolio.
How do I invest in a Mortgage Investment Corporation in Canada?
Invest a portion of your RRSP, TFSA and Non-Registered accounts in private market alternatives like a MIC to provide greater stability & returns to your portfolio.
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Get Started with Alternative Investing
Supplement your portfolio of GICs, stocks and bonds with up to 30% private market alternatives.
Is Your Current Portfolio Two-Dimensional?
Gaining seamless access to top-tier alternatives like a Canadian mortgage investment corporation really levels the playing field for you as an investor. You can now compete with the most resource-rich hedge funds and institutional money management firms and build your portfolio in all market conditions.
Enhance Your Returns
Return enhancement strategies seek to deliver a positive return regardless of the broader market direction, or to access a distinctive return stream.
Diversify Your Risk
Risk diversification strategies tend to have low sensitivity to investments such as stocks and bonds and may target a lower level of risk than is associated with a particular asset class.
Supplement Your Income
In periods of persistent volatility alternative sources of income provide higher yields than traditional investments by seeking income from a broader opportunity set than bonds and GICs.
5 Reasons to Invest in a MIC in Canada
I am looking for:
ELIGIBILITY FOR REGISTERED PLANS
Because of their more flexible lending criteria, ability to customize terms, and faster approval process (two to four weeks versus as long as two months with a bank), Mortgage Investment Corporations can charge higher interest rates. Returns may range from 6% to 10%, compared with less than 3% - 5% for a five-year Guaranteed Investment Certificate (GIC).
MICs in Canada pay no corporate tax because they flow through 100% of the interest income they earn to investors, typically in the form of monthly dividends.
MICs are qualified investments for Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-Free Saving Accounts (TFSAs), providing the opportunity for tax-sheltered growth.
Mortgage Investment Corporations are a fixed-income asset with no correlation to traditional asset classes such as equity stock markets. As a result, MICs can help to offset the volatility of equities and/or provide consistent income in a persistently low-yield environment. It's even better when interest rates are rising.
When you invest in a MIC, your capital is pooled with the capital of like-minded investors, enabling everyone to participate in a much larger real estate portfolio than you could on your own. In addition, you gain access to professional managers like RiverRock MIC whose sole job it is to manage the portfolio for the benefit of all investors.
Mortgage Investment Corporation Due Diligence.
When investing in a MIC, here are some of the most important factors to consider when making your decision.
Consider managers with a history in both lending and real estate through all housing market cycles. RiverRock MIC CEO and Manager Nick Kyprianou has 36 years experience and was formerly CEO of Home Trust Company
MIC managers who also hold shares have a vested interest or "skin in the game" in the ongoing success of the operation.
Highly marketable residential properties in urban and suburban areas tend to be easier to sell in the event of mortgage defaults and housing market downturns.
Historic defaults or loan loss rate are a key indicator of how well the portfolio is being managed, along with historic returns. Ideally, defaults and losses should be minimal and dividends should be consistent.
Low Loan-To-Value ratio, short duration, and a higher proportion of quality first mortgages are hallmarks of a lower-risk MIC.
With a Dividend Reinvestment Plan (DRIP), your monthly dividends are automatically invested in additional shares, compounding returns over time. You can also choose to take your monthly income without reinvesting.
mortgage investment corporation
Risks Associated With MICs
CREDIT QUALITY OF BORROWERS
With irrational and exuberant housing prices in Canada, the underlying collateral (homes) may not be sound. If housing prices decrease and borrowers begin to default on their mortgages a MIC may not be able to recoup all of their money on some homes that need to be sold.
MICs in Canada can invest in different types of properties including residential (at least 50%) and commercial, each with their own benefits. However, in the event of a mortgage default, some property types can be difficult to sell.
Credit Quality of Borrowers
Mortgage Investment Corporations provide mortgages to people who do not qualify with traditional lenders like banks. If someone is willing to pay upwards of 10% interest on a mortgage from an alternative lender, it could indicate that they are a subprime borrower which increases the risk of a mortgage default.
Stability and Security with RiverRock MIC
RiverRock MIC is built like a trust company whereby they issue private mortgages in 6-12 month terms like any mortgage you receive at the bank. The borrower signs a contract just like they do when they take out a mortgage from the bank. The borrower makes interest payments monthly just like the bank but the rates charged are higher than the bank and vary from 8.49% to 12.99%, since they issue both first and second mortgages. These mortgages are typically issued to self-employed and other individuals who typically can't go through the bank channel.
Borrowers pay monthly payments and the MIC distributes the income. It is the interest payments charged that is your return for investing in the MIC. Similar to a GIC, the return is the rate you buy for the term. Currently your return would be 7.25% paid monthly with target of 8% for February 2023.
New money is needed to invest in new mortgages each month but there are also repayments each month as well since these are all short term mortgages so lots of liquidity for you as an investor.
Does this mean that MICs are always risky?
This isn't necessarily the case. Here are some of the ways that RiverRock MIC reduces the risk of it's investors.
Typically, MICs provide loans of 6 to 24 months. Shorter terms and more rapid borrower turnover reduce exposure to interest-rate risk and fluctuating real estate prices.
LTV is the amount lent as a percentage of the value of the underlying real estate. The lower the LTV, the lower the risk. If a MIC needs to sell a property, a low LTV makes it easier to recover the outstanding loan value, especially when home values decrease after a housing bubble ‘bursts’.
Investing in mortgages of properties that are highly marketable, owner occupied and located in populated geographies helps to reduce the impact of a potential downturn or default.
Mortgage Investment Corporations can hold first, second or third mortgages. First mortgages carry the least risk as they have priority claim on the underlying real estate security in case of default. RiverRock MIC holds mostly quality mortgages.
Employing independent boards of directors, auditors, and property appraisers. Some MICs make it mandatory for every loan to be approved by an independent board.
RiverRock MIC on average issues mortgages with Loan-To-Value (LTV) of 68%. This means that if there were a housing downturn or bubble, the market would need to drop about 32% after first eating through the 7-8% return before it affects your capital.
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MIC Investor Considerations - Do You Qualify?
mic Investment Qualification Criteria
The private markets exist to provide small private issuers with a cost-effective and efficient market to raise capital. As a result, these private issuers are not subject to the requirements of the reporting issuer regime; they are less transparent; they are subject to less oversight by the regulators; and they provide less protection for investors with respect to statutory rights and disclosure. They are typically offered through what's called an "Offering Memorandum".
This makes most alternative investments higher risk and not appropriate for most investors. Therefore, under the exempt market regime, only certain investors, namely those with more sophistication and means to withstand loss, are eligible to invest in exempt securities.
In general to qualify you have to be a high income earner or have substantial liquid assets, known as an "accredited investor". Get in touch with us to discuss if you qualify and see if alternative investments are suitable for your portfolio.
mortgage investment corporation faq
Questions for the MIC Portfolio Manager
MICs Frequently Asked Questions
A Mortgage Investment Corporation (MIC) gives investors a way to access and profit from the real estate market, reducing the time and risk of investing in individual mortgages. As an investor you pool your money by buying shares in a MIC like RiverRock, creating an alternative fixed-income investment.
As 'special companies', MICs are created by virtue of Section 130.1 of the Income Tax Act, a federal statute, to enable accredited investors to invest in a pool of mortgages. Mortgage Investment Corporations may also borrow from a bank or other lender, employing both the shareholders’ capital and loan proceeds to fund the mortgage portfolio.
The pool of mortgages you're invested in is continuously managed, with newly invested share capital, and the proceeds of repaid and discharged mortgages, being utilized to fund new mortgages.
Your invested capital is pooled with other investors and used to fund mortgages. These mortgages are secured by Canadian real estate, mostly Ontario GTA real estate for RiverRock.
The yield or return you receive as an investor is based on the interest rates and fees charged to borrowers with the mortgages. Compared to many other real estate investments, MICs generate monthly cash flow through interest payment made by borrowers.
By law, the Income Tax Act requires that you as an investor and shareholder receive 100% of a MIC’s annual net income which is typically distributed as a dividend.
Mortgage Investment Corporations in Canada are only available to "accredited investors" and offered through an exempt "Offering Memorandum". MICs are not publicly trade like your typical stocks on the Toronto Stock Exchange and therefore not by nature considered "liquid" such that you can buy and sell daily.
Compared to Term Deposits like Guaranteed Investment Certificates (GICs), MICs such as the RiverRock MIC are more liquid and can be redeemed within 6 months whilst getting your monthly dividend. Whereas with a GIC if you redeem early (if allowed) you lose your interest.
This is because your investor capital is pooled and placed in short-term mortgages. In order to achieve the target rate of return (8% as of February 2023), RiverRock works to place your invested capital in mortgages rather than holding funds in a cash account.
RiverRock also plans for and anticipates your monthly dividend payments as well as potential redemption requests you may make. Redemption request timing, standard expectations and further details can be found in RiverRock MIC’s Offering Memorandum (OM).
Due to tighter and increased regulations, Banks and Trust Companies have restricted their lending practices. Many of these are self-employed. This has created a void leaving many responsible and credit-worthy people with limited viable home financing options because of these tightened regulations. This gap has created a significant opportunity for RiverRock to provide mortgage and investment alternatives.
RiverRock MIC offers investors a high-yield alternative fixed income investment within the high-performing real estate market. As a lender in Ontario, RiverRock caters to clients that are typically self-employed individuals, borrowers with poor or limited credit history or new immigrants to Canada. The investment objective is to identify relatively low-risk, first and second residential mortgages in Ontario, with a maximum loan-to-value ratio of no more than 80%.
RiverRock generates all of its mortgage applications through licensed mortgage agents and brokers. By combining several high-quality mortgages into a diversified pool, they can mitigate the risks associated with investing in a single mortgage. The diversification of the portfolio provides stability through an extremely low-default rate, offering investors a secure investment with an attractive rate of return. The initial target yield to investors is 7.25% (F Class share), net of all fees and expenses.
Based on the Income Tax Act, Section 130.1:
- A Mortgage Investment Corporation must have at least 20 shareholders.
- A MIC is generally widely held. No shareholder may hold more than 25% of the MIC’s total capital.
- At least 50% of a MIC’s assets must be comprised of residential mortgages, and/or cash and insured deposits at Canada Deposit Insurance Corporation member financial institutions.
- A MIC may invest up to 25% of its assets directly in real estate, but may not develop land or engage in construction. This ceiling on real estate holdings does not include real estate acquired as a result of mortgage default.
- A MIC is a flow-through investment vehicle, and distributes 100% of its net income to its shareholders.
- All MIC investments must be in Canada, but a MIC may accept investment capital from outside of Canada.
- A MIC is a tax-exempt corporation.
- Dividends received with respect to directly held shares, not held within RRSPs or RRIFs, are taxed as interest income in the shareholder’s hands. Dividends may be received in the form of cash, or additional shares.
- MIC shares are qualified RRSP and RRIF investments.
- A MIC may distribute income dividends, typically interest from mortgages and revenue from property holdings, as well as capital gain dividends, typically from the disposition of its real estate investments.
- A MIC’s annual financial statements must be audited.
- A MIC may employ financial leverage by using debt to partially fund assets.
In general, a MIC is offered via a prospectus exemption through an Offering Memorandum. You must be an "accredited investor" to qualify. What is considered an accredited investor?
- An individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that, before taxes, but net of any related liabilities, exceeds $1,000,000 (e.g. RRSP, RRIF, TFSA),
- An individual who beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5,000,000,
- An individual whose net income before taxes exceeded $200,000 in each of the two most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year,
- An individual who, either alone or with a spouse, has net assets of at least $5,000,000
- A business owner with at least $150,000 to invest in a MIC
As an investor you can choose to take advantage of automatic dividend reinvestment plan (DRIP) and gain the benefit of compounding your return. Alternatively you can receive your monthly dividends by direct deposit to a specified account.
RiverRock MIC has a 6-month redemption period which commences from the month end of initial subscription. For example, based on the 6 month redemption notice, if you as an investor sell on December 1, you get June's Net Asset Value (NAV) that settles in mid July. The RiverRock Offering Memorandum provides further detail.
For income tax purposes, the returns that you as an investor receive are treated as interest, not as dividends, taxed 100% in your hands.
No. The underlying security is the Canadian real estate property against which the mortgage charges and, in most cases, the personal guarantees of the owners of the property. The RiverRock MIC has never lost money since inception and has paid out positive interest income each year. In addition, the risk mitigation measures followed allow for consistent returns on top of capital preservation.
RiverRock MIC is available to both individual and institutional investors. The minimum investment is $150,000 ($25,000 for accredited investors).