Last Updated on October 3, 2024 by CREW Editorial
Mortgage investing is increasingly recognized as a valuable strategy for portfolio diversification and generating steady income, particularly in today’s economic environment. However, investors should thoroughly understand the different avenues available, especially the distinctions between mortgage investment corporations (MICs) and whole mortgage investing. Knowing these differences is important for determining which option best aligns with your investor profile, capital availability, and risk tolerance.
As Chris Baker, Vice President of Investment Sales at CMI Mortgage Investments, emphasizes, “It’s crucial for investors considering a mortgage investment to have access to ample information to make good decisions, including a clear understanding of the differences between MICs and whole mortgage investing. We pride ourselves on empowering our clients with the information they need to make confident investment choices. When considering any investment opportunity, it’s important to understand all of its aspects.”
What Are Mortgage Investment Corporations (MICs) and MIC Funds?
MICs are financial entities that pool capital from multiple investors to fund a diversified portfolio of mortgages. One of the significant advantages of MICs is their tax treatment under Canada’s Income Tax Act. MICs can distribute all their income to investors without incurring corporate taxes, making them an attractive option for those looking to maximize returns.
Benefits of MIC Investing
MICs offer a range of benefits that make them an appealing option for many investors, including key advantages like accessibility, diversification, professional management, and predictable income.
Accessibility
MICs are accessible to a broad range of investors, with minimum investments starting as low as $5,000 or $10,000. This makes them ideal for investors who either fall short or prefer not to commit the full capital required to fund an entire mortgage, yet still seek real estate exposure.
Intrinsic Diversification
MICs provide exposure to a pool of mortgages, reducing risk through diversification based on the mortgage type and duration, security position, loan-to-value (LTV) ratio, property type and location, geographic region, and borrower profile.
Compounding on this benefit, unlike most MICs, CMI’s MIC funds offer nationwide exposure, which enhances geographic diversification across various Canadian markets. CMI offers three different funds tailored to different risk tolerances, allowing investors to choose the one that best fits their risk appetite and financial goals.
Professional Management
MICs are managed by experienced teams who handle mortgage selection, administration, and risk management, making this a hands-off investment for investors. For example, CMI’s in-house mortgage administration team manages all aspects of each mortgage, from repayments and borrower correspondence to unforeseen events. This ensures smooth operations and gives investors peace of mind. CMI also ensures that all regulatory documentation is in order and maintains ongoing quality control, adding an extra layer of security and confidence for investors.
Chris Baker notes, “Typically, MICs offer regular income through monthly distributions. Finding the right fund to match your risk tolerance and income goals is important. CMI offers a conservative fund with a target annual return of about 7%, a balanced fund with an 8-9% target return range, as well as a high opportunity fund with potential returns as high as 11%.”
Other Considerations
There are some considerations to be aware of with MIC investing, such as a lack of customizability, potential exposure to regional risks, and variability in returns, however.
Lack of Customization
With MICs, investors have no control over specific mortgage selections since their investment is part of a larger pooled fund.
Potential Regional Risk
Even with diversification, MICs can be exposed to regional risks, especially if a significant portion of their portfolio is concentrated in underperforming areas. However, CMI mitigates this risk by offering nationwide exposure with their MICs, reducing the likelihood of concentration in any single region.
Return Variability
While MICs typically target a specific annual return range, actual yields can vary due to factors such as the composition of the mortgage portfolio and the economic conditions in the regions where the mortgages are located. Investors should prioritize MIC providers with a consistent track of delivering on their targeted annual returns.
What Is Whole Mortgage Investing?
Whole mortgage investing involves directly funding entire mortgages, giving investors full ownership and control over the terms, borrower selection, and property type. This approach requires a more substantial capital commitment and offers different risk and return profiles compared to MICs.
Chris Baker explains further, “Whole mortgage investing typically requires a substantial capital commitment. We recommend having at least $1.5 million in liquid assets before considering this type of investment.”
Benefits of Whole Mortgage Investing
Whole mortgage investing offers unique benefits that cater to investors seeking direct control and the potential for higher returns. By enabling investors to select specific mortgages, this approach provides a customized investment experience, with opportunities for strategic diversification, regular cash flow, and tailored risk management.
Customization and Control
By investing in a specific mortgage or mortgages, investors have the ability to choose investments that align with their risk tolerance, yield objectives, and investment goals. This level of control allows for a more tailored investment approach, which can enhance potential returns.
CMI’s unique mortgage matching process curates customized mortgage investment opportunities, aligning investors with suitable loan types, properties, market locations and borrowers based on their individual goals and preferences, ensuring a personalized experience.
Higher Return Potential
Investors can target higher-yielding mortgages, which may lead to greater returns compared to MICs. As Chris Baker highlights, “Returns vary depending on the risk profile of each specific mortgage. Investors willing to take on higher potential risk can earn as high as 16%.”
Enhanced Diversification Opportunities
Whole mortgage investing allows investors to strategically diversify by choosing mortgages across different regions, property types, mortgage types, and borrower profiles. Additionally, with CMI, investors can gain access to diverse mortgage investments across Canada, broadening the range of options for strategic portfolio diversification.
Regular Cash Flow
Whole mortgage investing generates steady income from regular mortgage payments, which are typically received monthly, with the potential for higher yields due to customized mortgage selections.
Other Considerations
It is important to be aware that whole mortgage investing is more complex, requiring significant capital, greater responsibility, and careful risk management.
High Capital Requirement
The significant upfront investment required for whole mortgage investing limits its accessibility, making it more suitable for high-net-worth individuals or institutional investors.
Increased Responsibility and Complexity
Investors must manage the mortgage directly, dealing with borrower issues and ensuring legal and regulatory compliance. However, with CMI’s full-service mortgage investment program, these burdens are alleviated, as they manage every aspect of the mortgage investment, from administration to compliance, making whole mortgage investing as hands-free as possible.
Geographic and Borrower-Specific Risks
Whole mortgage investing carries more potential risk because investors are funding individual mortgages directly, whereas MIC investments spread capital across multiple mortgages. Also, concentration in specific regions, property types or borrower profiles can increase risk, especially if economic conditions in those areas decline. Diversification helps mitigate these risks.
Accredited Investor Status Required
Whole mortgage investing is restricted to individuals with accredited investor status. In Canada, this status is defined by specific financial criteria. Generally, an individual must have an annual income exceeding $200,000 individually or $300,000 combined with a spouse, for two consecutive years, with the expectation of meeting or exceeding that in the current year. Alternatively, an individual can qualify by having over $5 million in net assets or $1 million in financial assets, either alone or with a spouse.
Key Differences Between MICs and Whole Mortgage Investing: Which Is Right for You?
When deciding between MICs and whole mortgage investing, several factors should be considered, including capital requirements, control, diversification potential, management involvement, and return potential.
Investment Capital Requirements
MICs are accessible to a wider range of investors due to their lower capital requirements. They are suitable for those looking for real estate exposure without having to commit substantial capital. On the other hand, whole mortgage investing requires significant capital and is more suitable for high-net-worth investors seeking more control and potentially higher returns.
Customization and Control
There is limited control involved with MICs, as investors participate in a pooled fund managed by professionals. Whole mortgage investing, however, provides full control over mortgage selection, terms, and borrower profiles, for those looking for a more active role. CMI enhances this control through its mortgage matching process, which aligns investors with customized mortgage investment opportunities.
Diversification Potential
MICs provide built-in diversification across a portfolio of mortgages and regions, making them suitable for those seeking risk mitigation through broad exposure. However, the level of diversification can vary depending on the fund manager. Most MIC funds are regionally focused – primarily within Ontario and BC – limiting the geographic diversification potential. CMI’s MIC funds stand out by offering diversification across the Canadian market, not just specific regions.
Whole mortgage investing, while allowing for strategic diversification, requires active management, regional market knowledge, and careful selection. CMI again provides access to a wide range of mortgage investment opportunities across Canada to support strategic diversification efforts.
Management and Involvement
MICs are professionally managed, requiring no investor involvement. CMI makes it even easier, with streamlined processes and integrated software solutions to ensure efficient and transparent management of its MIC funds. Whole mortgage investing, by contrast, requires active involvement unless managed by a third party. CMI’s full-service offering and comprehensive management services minimize the need for investor involvement, making whole mortgage investing as seamless and hands-off as possible.
Return Potential
MICs offer more predictable, but generally more modest, returns, balanced by professional management and diversification. Whole mortgage investing, allowing direct control and the ability to customize investments, comes with greater risk and responsibility, but also a higher return potential.
Choosing the Right Investment Strategy
Investors should carefully consider their capital availability, desired level of control, and risk tolerance when deciding between MICs and whole mortgage investing. Working with a company that takes the time to understand your goals and help you select the right investment – while also managing the investment process from end to end – can greatly enhance your success.
As Chris Baker notes, “When choosing a private mortgage investment program and provider, it’s essential to investigate the quality of the underlying assets and the management team, making sure their mission, strategies, and products align with your investment style.”
CMI Mortgage Investments offers comprehensive solutions with expert management, nationwide reach, and customizable options to suit diverse investor needs. They take the time to ensure that your personal goals are addressed, helping you navigate the complexities of mortgage investing with confidence.
