Primer on Mortgage Investment Corporations (MICs)

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?

MICs are eligible to be held in taxable and tax sheltered accounts like RRSPs and RRIFs (maybe even TFSA?).

Taxation

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.

Conclusions

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.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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AL
11 months ago

Now that this column is over 10 years old, it could be fun to revisit it and analyze how MICs have performed over the last 10 years.

fudgecake
10 years ago

Firm Capital Mortgage Investment Trust is converting to a MIC in January 2011. At this point it trades like a regular stock and apparently it will trade as a stock after conversion. It has an excellent reputation. I’ve owned it for years.

BidAsk
11 years ago

MICs are very different than REITs. The per unit/share price of REITs can fluctuate largely just like common stock. This is the same reason why contrary to popular belief certain bonds, like long-term 10 or 30-year bonds can be very risky for a conservative income investor – if the funds are required prior to maturity there can be large gains or losses associated with that situation.

With MICs there is no capital gain/loss portion, just the income, with the original principal received upon redemption.

This is a big difference and is a large reason why MICs can be a good product for certain people.

Aniz Vasanji
11 years ago

you’re very welcome – glad I could help answer your questions.

Maddog1965
11 years ago

Thanks, Aniz. That explains it. The IPUs do seem better than most, if not all, MICs, especially after tax.

Aniz Vasanji
11 years ago

The target is 80%, however the actual for 2009 will be 100% ROC – we buy under-developed,and under-capitalized buildings – the buildings are then, in most cases, re-developed (upgrading and modernizing the buildings – expanding the leasable spacing) all costs associated with each of the properties in the portfolio gets added onto CCA – while these properties undergo renovations, the occupancy rate is low, therefore the revenue from these properties in the first year is low, so in a lot of cases, in the first year, the CCA is more than the revenue from the properties – distributions are also paid out from investment income, resell of properties and 2nd mortgages – going forward your analysis will be correct where revenue will be more than CCA

Maddog1965
11 years ago

It doesn’t matter how many more properties you buy, each new property brings more rental income to offset with CCA, as one would hope. If everything goes right, each building always generates more income than CCA. The question is how much more. I think rental income should be at least twice as much as CCA. There simply isn’t enough CCA to provide 100% tax-free income (80% in the brochure) when occupancy rate is high and rental income goes flat or up while building book value and CCA go down. Either you are overstating tax efficiency (ROC), or your properties are not generating enough income to cover depreciation by a significant margin.

I understand that the terms of the IPU imply your willingness to fix the price, but if ROC is more than what CCA alone can produce, there is a question of your ability to fix the price.

Aniz Vasanji
11 years ago

there is a build up of depreciation as you buy more properties – each year you are acquiring new properties – the nature of this investment is a term investment with a fixed distribution, so the distributions will stay fixed till the end of the term similar to a GIC where the rate is what you get for the duration of the term. Also, like a GIC, the price will stay flat and will not fluctuate

Maddog1965
11 years ago

Aniz,

At 6%, CCA itself declines at a rate of 6% per year in dollars. If there is 9.25% cash income to distribute, how can you have enough non-cash expenses (depreciation) to offset all the income to make it 100% ROC? You may have 25%, even 50%, ROC, but if it is 100% ROC, the price can’t be fixed.