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Investing in MICs
What are MICs?
Mortgage Investment Corporations (or MICs, pronounced micks) are becoming more and more popular when it comes to investments in Canada due to the fact that they provide a good income stream and can often consistently produce double-digit returns. A MIC offers an alternative to stocks and bonds for an investment portfolio that is both secure and and gives a good return on investment. As the interest on mortgages is compounded, the MIC will continue to provide a passive stream of income that is paid, usually, as monthly dividends.
When investors invest their money in a MIC, they are adding their money to a pool that can then be lent out to others in the form of mortgages. All of the net profits made from those mortgages is paid back to the investors, usually as dividends. Basically, they are a form of private mortgage lending in Canada, and have been around since 1973, although they have really gained in popularity in the last few years.
The people who tend to borrow from a MIC have often found that they can't raise the capital they need through conventional lenders. The mortgages themselves tend to be for the short term, often not longer than a year, and carry higher interest rates than those offered by banks or other public lenders. As with traditional mortgages, the mortgages funded by a MIC are secured by a piece of property. Many MICs also require additional security, such as other properties or insurance policies.
Are MICs for You?
Being more secure than stocks and bonds and giving a higher return rate than the money market would make investing in MICs seem like an easy decision to make. Before liquidating all your assets, and transferring them into MICs, it's important to consider if this type of investment is really for you.
All MICs must have at least 50% of their investment capital invested in the residential mortgage market. As a result, the majority of the risk of investing in a MIC is linked to the residential mortgage default rate. This rate is extremely low, as residential real estate defaults are relatively rare, so the risk in investing in a MIC would appear to also be very, very low.
Unfortunately, not all MICs are the same. Where the difficulty comes is in the definition of the residential mortgage market. What the MIC is actually investing in, such as second mortgages vs. first mortgages, can significantly increase the risk associated with the investment. Construction loans and bridge loans can also be included as part of the residential mortgage section of the MIC.
Before deciding to invest in a MIC, it's important to consider a number of factors.
How to Pick a MIC
Risk factors to consider before investing in a MIC include:
- How long has the MIC been in business? - the longer, the better really, with a good choice being one that has a good track record and has been in business for at least 12 years, so that it has experienced the highs and lows of real estate
Consistent and predictable dividends - the MIC should have been paying out dividends that are consistent in amount for several years, without interruption. Portfolio and management problems are indicated by suspensions in payments or inability of investors to remove their money
- Is the MIC concentrated? - the type of mortgage, the borrower, and where the properties are located should not be concentrated. The higher the same type of mortgage, lending to the same borrower, or same location of the properties, the higher the risk associated with the MIC
- Cash out provisions - find out what the regulations of the MIC are when it comes to cashing out your money. Ensure that you have a clear end date for getting your money out of the MIC. If a date isn't given, don't invest
- Portfolio performance - examine the portfolio of the MIC, and also review audited financial statements and dividend statements over several years to track how the MIC has been doing money-wise
There are many more questions you can ask before investing in a MIC. As with any investment, the more you know the better in the long run, so get as much information on the MIC as you can before committing in any investment.