MICs: An effective diversification strategy for private mortgage investments

Mortgage investing has gained considerable notoriety in recent years as more investors realize the opportunities and diversification that are inherent with these investments.  In particular, private mortgages have started to carve out their own niche in the broader mortgage investment spectrum as investors recognize the unique values these products afford.

Beyond their value as a diversification play, private mortgage investments can also be an excellent way to derive solid yields for your portfolio. The challenge for many investors is having access to the, sometimes significant, investable assets necessary to purchase a private mortgage.

This is where Mortgage Investment Corporations (MICs) come into play. These investment products significantly lower the barriers to entering the private mortgage market. With that comes a number of other benefits as well.

 

Understanding private mortgage investments

Private mortgage investments have their own set of unique attributes, which provide a compelling case for their inclusion in your portfolio. Likely the most important attribute is that these products, like many other alternative investments, are NOT correlated with publicly traded markets. What this means is that these assets will fluctuate independently from stocks and bonds traded on public exchanges.

Thus, private mortgages are not directly impacted by fluctuations in stock markets. Given their current volatility and unpredictability, this is undoubtedly a good thing for most investors. Private mortgages also offer investors a more consistent and stable rate of return relative to publicly traded assets, thus avoiding the rollercoaster ride many public equity investors regularly experience.

Moreover, back in January Statistics Canada noted that non-bank private mortgages have increased tenfold from 2007 to 2018. This has great implications for investors, as increased demand from borrowers directly translates into increased investment opportunities for investors. As more and more borrowers turn to private lenders for their mortgage needs, contributing to the expansion of the private mortgage market,  the demand for mortgage investments to fund these mortgages increases.

MICs fill the gap

One of the limitations with “whole” private mortgage lending is that a sizable sum of liquid assets is required to fund these opportunities. For the average investor, this dollar value is not realistic. This is where MICs can help fill the void by offering investors an alternative way to access the private lending market.

With capital requirements starting at only $5,000, MICs offer many investors the opportunity to tap into the private mortgage investment market and add a unique asset to their portfolio.  MICs accomplish this by pooling the capital from multiple investors into a fund that private lenders can, in turn, access to provide borrowers with private mortgage solutions.

 

Growth in private mortgage investments in Canada

As the Canadian Mortgage Housing Corporation (CMHC) pointed out in their inaugural Residential Mortgage Industry Report in Q3 2019, more stringent lending and regulatory policies have shifted mortgage origination away from traditional banks and credit unions to alternative lenders. These trends bode well for the sustained growth of MICs as private lenders. Therefore MICs continue to actively seek investors interested in funding their private lending solutions. 

This can indeed become a true win-win scenario for both borrowers and investors. Borrowers benefit since private mortgages offer them an alternative to the more restrictive mortgage products offered by traditional lenders, which often have approval criteria and regulatory hurdles (like stress tests) that limit access for many borrowers.

Investors benefit as they gain access to a growing pool of mortgages that deliver a relatively stable and competitive rate of return. The smaller capital requirements available through a MIC creates a lower barrier to entry for the average investor, enabling them to access these products while also being able to incrementally add to their portfolio over time if they so desire.

MICs as a diversification strategy

What makes MICs an even more compelling opportunity relative to whole private mortgages is the diversification benefit that comes with investing in a MIC. To begin with, since MICs by definition are a pooled investment product, they provide investors access to a diversified portfolio of private mortgages, each with its own unique characteristics, pricing and conditions. 

As an alternative investment that’s not correlated with public markets, MICs provide a unique asset class that investors can use to diversify their portfolios away from stock and bond markets while also enhancing your asset allocation strategy. This approach has become even more relevant given our current volatile and unpredictable market conditions. 

Diversification is in fact one of the primary forces driving investors to seek alternative investments since it can help to better manage volatility. With its ability to also offer attractive and more stable yields due to the nature of its underlying assets, the case for including MICs in your investment portfolio is difficult to deny.

Selecting the right MIC Fund

Given the number of MIC providers in the market today and the limited track record for many, selecting the right fund is by no means a straightforward exercise. Investors wishing to venture into the MIC market must first gain a sound understanding of the asset management firm’s capabilities, experience, infrastructure and culture to determine if it will be a good fit for them. 

Of these criteria, industry experience and expertise along with a strong management structure are critical components when selecting a MIC fund provider. The fund manager needs to have expertise in mortgage underwriting in order to optimize the investment opportunity, while a solid due diligence process needs to be in place in order to effectively vet the lending process and administer these assets.

 

The CMI MIC Family of Funds

The CMI MIC Balanced Mortgage Fund provides a way for individual and corporate investors to access the Canadian real estate market and take advantage of the economies of scale inherent in this pooled investment product. 

CMI’s extensive experience in mortgage underwriting coupled with a strong due diligence process enables them to offer investors a superior MIC with a solid track record for performance. Highlights of the CMI MIC Balanced Mortgage Fund include the following:

  • Targeted annual returns of 8-9%
  • The yield that’s generated from interest and fees charged to the borrowers
  • Fixed interest rate allows for more predictable cash flow
  • Monthly dividend payments 
  • Dividend reinvestment plan (DRIP) available for compound investing
  • Diversification through a pool of mortgage assets
  • RRSP, RRIF, RESP, LIRA and TFSA eligible 

To learn more about the CMI MIC Balanced Mortgage Fund or our entire family of MIC Funds, contact us in the form below, or email us at info@cmimic.ca.