As an investor, gaining exposure to the residential real estate market no longer means having to acquire property or become a landlord. It doesn’t require carrying an illiquid asset during turbulent market cycles or worrying about high overhead costs.
With private mortgages, investors can gain direct exposure to residential real estate without the hassle of homeownership or title transfer. As a fixed-income investment opportunity, private mortgages also offer income streams that can be more competitive, in terms of yield, than traditional bonds.
For most investors, Mortgage Investment Corporations, or MICs, are a very suitable entry point into the private mortgage market. Accessibility, low investment minimums, professional management and a passive investment experience are all reasons why many investors choose MICs.
However, not all Mortgage Investment Corporations are alike. When evaluating MICs, be sure to review the fund manager’s experience, investment options, geographic diversification, second-mortgage exposure and risk management strategies.
Here are the five things your MIC should be doing for you.
Experience and Value
When it comes to selecting the right Mortgage Investment Corporation, the experience of the fund manager is paramount. MICs with a proven track record of successful mortgage placements, achievement of yield targets, and sustainable, well-managed portfolios are more likely to satisfy investors. Experienced fund managers also have robust due diligence processes and a strong track record in dealing with delinquencies or collections, which should be reflected in a low loss ratio – ideally below 1%.
Like any asset class, Mortgage Investment Corporations are not one-size-fits-all. Experienced fund managers offer investors a selection of MIC funds with various risk and return profiles based on the mix of underlying mortgage types – first, second and third – and limit themselves to a maximum loan to value. Whether you’re risk averse, more aggressive with risk or seek a more balanced approach, the MIC issuer should offer a solution that suits your investor profile and preferences.
MICs that have a regional strategy are more likely to achieve their investment targets. That’s because increased competition in major markets such as Greater Toronto places downward pressure on yield. Alternative lenders also tend to be more concentrated in these markets, which means borrowers have a greater selection when seeking out a private mortgage.
For alternative lenders, real estate markets beyond the major cities produce demonstrably higher yields, which ultimately benefits investors. MICs that recognize this and allocate a portion of their portfolio to smaller cities and rural markets are more likely to outperform in the long term.
Second Mortgage Exposure
While MICs usually have a mix between first, second and third mortgages, the market for second mortgages is where most of the opportunity for yield lies. Second mortgages are often shorter in duration and are backed by a homeowner’s equity. Depending on the size and duration of the loan, second mortgages often have more favorable risk-return profiles. These mortgages typically produce yields that are higher than first mortgages.
Risk controls are an important factor when selecting a MIC. It’s important to understand how the fund issuer manages and mitigates risks. This includes rigorous processes for sourcing and adjudicating loans, limiting the duration and the size of the loans, and doing proper due diligence on the borrower and the property. These processes should be laid out in the MIC’s disclosure documents and other investor communications.
CMI Financial Group is one of Canada’s most experienced private lenders. With over $700 million in successful mortgage placements, we provide tailored investment solutions with a strong focus on risk management, geographic diversification and second mortgages.
To learn more about our CMI MIC Funds, contact us to schedule a free consultation.