This is an excerpt from an article in the March 2011 issue of Canadian Real Estate Magazine called “Optimizing MICs”
Mortgage Investment Corporations- The best kept secret in financing
In Part 2 you will learn how to use alternative lending sources to get your deals funded quickly and how to make money from them.
Risk, reward and redemption
An investor in a MIC is able to minimize risk by the fact that they are invested in a pool of funds which are in turn invested in many mortgages. MICs mitigate risk by excellent underwriting practices, via thorough assessments of both the property as well as the borrower, although having significant equity positions in good marketable properties is most important.
If there is a default on any mortgage, it is prudent for the MIC to be able to quickly dispense of the property to recover the loan amount and even make a profit. It is comforting to know however, that as of the end of Q2, 2010, the Canadian Bankers Association reported; “the default rate on prime residential mortgages in Canada is 0.42%.” Currently there is over a 99% recovery rate on principal interest and legal fees as a result of a foreclosure. If a lender does not recover their full principal, interest and legal fees in the foreclosure process, often the mortgagor has recourse to go after the borrower by attaching any other property they have, plus garnishing their wages for up to 10 years or until full recovery is completed. Borrowers from MICs are informed of this process and generally do not default.
MIC investments have varying degrees of risk/return for an investor to choose from. The highest security/ lower return investments are in residential 1st mortgages; higher yielding/ medium security would be invested in 2nd mortgages and high yielding/lower security investments could be in construction projects.
Based on market conditions, returns can fluctuate slightly and the overall performance of the portfolio may change accordingly, however in a well managed MIC, an investor’s capital should never be in jeopardy. A good management team will also ensure a stable revenue stream to its investors by setting aside some income out of the revenue in the case of potential loss within the funds. The bottom line is; because the investment is in mortgages which are due and payable by every borrower every month, the growth is steady with only small fluctuations in return.
In terms of redeeming your investment dollar, as in most investments, there are fees for pulling your money out prior to say, a one year commitment. These redemption fees decrease the longer your money in working in the funds.
How do I choose the right MIC to invest in?
As a real estate investor, we are used to doing proper due diligence when checking out any property. This is no different. When investigating a MIC, one must get acquainted with a number of key factors possessed by a successful MIC in order to make a confident investment decision. Here are some key questions one should ask prior to making the decision to invest:
- How long has the MIC been in existence?
- What is the MIC’s history of performance?
- What is the experience of the managers?
- What is their process of creating deal flow?
- Does the MIC currently hold any physical properties?
- Is there a particular niche market you go after or specialize in?
- Are you speaking to the person who will be making the investment or a salesperson?
- Can you call up any time to ask about decisions that have been made?
- Does the MIC offer complete disclosure of its mortgage investment details?
- How does the MIC diversify its mortgage investments to protect investors?
- Is there a provision for losses and liquidity?
- What is the minimum investment amount?
- What is the fee to redeem early?
How can my deals get funded?
As a real estate investor, here’s where the rubber meets the road. I want to get my deals funded quickly and easily. Fortunately MIC funds flow better than conventional lending institutions. Management is usually in house, so the underwriting, approval and funding can happen much quicker than through other conventional lending sources.
Qualification is generally much “smoother” through a MIC as the property or project is the emphasis. Typically the types of deals that will get funding have a number of common factors. The properties must show either good income, have a strong equity position, display excellent growth or forced appreciation and have good marketability.
MICs generally are used for short term lending. Anywhere from 3 months to a year is typical. As a real estate investor, one can use MIC mortgage loans to fund fix and flips or as short term money to procure buy and hold deals or lease options which can be refinanced later using cheaper money from institutional lenders.
Construction and development financing is approached with the MIC’s own advances, draws, and inspections so the time lines to get projects underway are much faster than working with conventional institutions.
In general, MICs can be used much more by the Canadian Real Estate investor as a tool to grow a healthy portfolio of rental properties, renovation properties and even construction projects as well as a great place to park your real estate profits until you are ready to do your next project.
Alternative Lending Sources