A regular reader emailed me about how his financial advisor recommended that he invest in Mortgage Investment Corporation (MIC) and was wondering if they were a good idea or not. Seeing that I’ve never heard of a mortgage investment corporation before, I had to do a little digging to get the details.
What is a Mortgage Investment Corporation (MIC)?
These companies provide “private” mortgages to mostly residential properties at higher than posted rates. These private mortgages are funded by investors (and banks) and in return, they get a portion of the mortgage return.
A MIC is structured very similarly to an income trust where they “flow through” all of their income to investors. With this type of business structure, the MIC will face very little or not tax which gives it the ability to pay higher distributions. On the flip side, it means that it’s the investors who foot the tax bill. More on taxation below.
One thing to note though that MICs lend money to borrowers who can’t qualify for traditional mortgages offered by the big lenders (big banks etc). This would lead me to believe that these borrowers have sub par credit or other blemishes to their financial record. This is something to keep in mind when evaluating the risk in these investment vehicles.
Where can they be held?
MIC distributions are treated like interest income if the MIC is held outside of an retirement account. What does this mean? If you receive $100 in distributions from a MIC, then you’ll basically add $100 to your earned income for the year. So if you’re marginal tax rate is 40%, then you’ll owe $40 in tax.
What are the Returns?
Like any investment, the returns can vary. From my research however it seems that most return around 8-10% in distributions (after their fees). However, these numbers are based on the past and do not indicate future returns. Who knows what the returns would be like with increased defaults during a recession.
What are the Fees?
From my reading of various MIC’s available, they typically charge a 1.75% – 4% MER range.
What I like
If you are interested in investing directly in private mortgages without all the administrative headaches, then a mortgage investment corporation may be the answer.
What I don’t like
To me, there seems like a lot of risk investing in a mortgage investment corporation. Most MICs require a substantial investment ($25k+) and a long minimum investment period (3 years +). To top it all off, the invested capital or distributions aren’t guaranteed like a longer term GIC. Even though most investments do not guarantee capital, the lack of liquidity is a real turn off.
As well, like I mentioned above, default rates on mortgages funded by MICs may be higher due to who they are lending to. Poor credit in conjunction with higher mortgage payments sounds like a mistake waiting to happen.
While MIC returns sound ok on paper, my question is, why not simply invest in a REIT? While a REIT typically distributes rent collected to investors instead of interest from mortgages, their distributions are similar along with the benefit of high liquidity.
Overall, I give MICs a thumbs down, mostly due to higher risk and lack of liquidity (ease of selling). In my eyes, a REIT would be a much better choice.