Investment strategies - there are plenty of them out there.
Most traditional ones involve low, static rates of return, or varying degrees of risk and reward found on the markets. But you may have heard of an alternative that can deliver better, more consistent and resilient returns.
Mortgage investing involves dedicating investment funds to financing real estate, which does away with the day-to-day responsibilities and costs of acquiring and then renting a property to a tenant.
While it sounds pretty straightforward, there are considerations when deciding what type of mortgage investing you choose - whole mortgage investment programs or mortgage investment corporations (MICs).
How do these mortgage investment options differ?
“The key difference between whole mortgage investments and MIC funds lies in customization and risk concentration. While whole mortgage investors can customize the terms of their mortgage investment, they take on the full risk of a single loan, meaning that if the borrower defaults, the investor absorbs the entire loss,” says Chris Baker, VP Investment Sales, with CMI Financial Group, a leader in the private mortgage investment sector.
“In contrast, MIC funds spread risk across a diversified portfolio of pre-selected mortgages, minimizing the impact if any one loan underperforms.”
Whole mortgage investment programs are aimed mainly at high net worth investors (those with a minimum of $1,500,000 in liquid capital) and are maintained by mortgage companies that manage the entire process, decreasing the risk and uncertainty involved with evaluating prospective borrowers.
They also provide the latitude for an investor to customize mortgage terms to meet their goals and preferences.
Most investments run from six to 36 months, with the majority spanning a year, during which the lender (investor) receives scheduled interest payments from the borrower.
While this arrangement can yield attractive returns - up to 16% historically with CMI - it does leave the investor open to the risk of problems with the underlying mortgage.
Guarding against this scenario is the involvement of a professional private lending firm that handles everything from sourcing high quality opportunities to managing ongoing administration and monitoring.
An alternative is using the assistance and expertise of a Mortgage Investment Corporation (MIC).
“MIC funds offer a compelling risk/return profile by spreading investor capital across numerous mortgages, significantly mitigating the risk of any single loan defaulting,” Baker says. “Investors can choose a portfolio that aligns with their goals, enjoying the benefits of diversification, expert management, and targeted returns typically ranging from seven to 11 per cent, depending on the fund.”
MICs also offer a broader appeal to investors who either fall short or prefer not to commit the capital required to fund an entire mortgage, yet still seek real estate exposure. MIC funds offer an accessible solution by pooling funds to invest in a diversified portfolio of mortgages for a group of investors.
Returns are generated from interest and fees collected from the mortgage borrowers and passed on to the shareholders in the form of dividends, usually monthly.
Using an MIC allows for a wide range of investment opportunities and can be included in a number of investment strategies, including registered accounts such as a TFSA, RRSP, RRIF or RESP.
"Whether investing in whole mortgages or MIC funds, mortgage investments offer an attractive alternative to traditional investment vehicles,” Baker says. “Mortgage investments are backed by property, providing peace of mind, and with shorter durations, they carry lower risk while typically offering higher yields compared to other fixed income options.”
CMI Financial Group is a non-bank financial services provider dedicated to helping investors achieve competitive fixed income returns for their investment portfolios by sourcing high quality mortgage investment solutions - backed by real estate - that match their investment objectives and risk tolerance.
For more information about the benefits of mortgage investing and determining if it is the right investment strategy for you, visit investments.thecmigroup.ca
