Why Choose to Invest Through a MIC?
Mortgage Investment Corporations are creatures of the Income Tax Act of Canada. They are unique corporate structures that allow for the flow-through of interest income and capital gains to their investors.
No Middle Men
Although they have existed for many years, MIC’s are still relatively uncommon investment vehicles. This is somewhat ironic given the superior returns to investors over the long-term. (Typically, annual returns are in the range of 8%-11%.) The explanation for their rarity may have more to do with the inability of “investment advisors” to earn trailer fees from MIC’s. In most cases, investors must deal directly with MIC’s and as such, they have remained off the radar screen of the majority of investors. However, as in most transactions, dealing directly cuts out the “middle men” and put higher returns into the pockets of the investors.
Superior Rate of Return
Investments in private mortgages can consistently earn returns in the range of 8% to 15% depending on the degree of risk. By consolidating a pool of mortgage investments through a MIC, investors will typically enjoy a safe return in the range of 9%-11% per annum. Investors who reinvest their income received each quarter should double their investment every seven years.
The rate of return for MIC’s compares favourably to other forms of investments, particularly in this uncertain time in the world stock markets. Set out below is a comparison of typical returns with 1 year and 5 year averages:
|
1 Year |
5 Year |
183 day Canada T-Bill |
2.7% |
4.5% |
Average 1 year GIC’s |
1.6% |
3.4% |
Average 5 year GIC’s |
3.9% |
4.6% |
TSE 300 index |
(14.1%) |
( 0.8%) |
Dow Jones Industrial Average |
(14.2%) |
4.1% |
Mortgage Investment Corporations |
8.75% |
10.0% |
Security
Unlike investments in stocks or bonds, mortgage investments are secured by tangible assets that you can “touch and feel”. Dundarave mortgages will not exceed a percentage of the appraised value of the real estate security, commonly referred to as the “Loan to Value Ratio”. As none of our mortgages will be for an initial term longer than 24 months, Dundarave can manage the risk in the event of declining values.
For the purpose of risk comparison, consider a mortgage investment today in the amount of $150,000. Under our typical investment criteria, Dundarave would only fund that loan on a 75% Loan to Value Ratio, requiring the borrower to grant a first mortgage on a real estate property appraised at $200,000 or greater. Let’s say that in 2 years, property values declined by 25%, the initial $150,000 investment would still be intact. On the other hand, if your $150,000 mutual fund investment declined by 25% over the same period, you would have lost $37,500 of your capital, with no return in the meantime.
Low Volatility
In the world of the stock markets, investment is always a zero sum game. Someone wins, someone loses. Every trade your mutual fund manager makes is either a right decision or a wrong decision. Unless it pays a high yielding dividend, when you buy a stock or a mutual fund unit, you buy it on the hope that someone else will come along and buy it from you for more than you paid for it.
Think about that.
Your investment is only worth what someone else thinks it is worth. As we have seen markets reel in recent times, it is clear that the markets are volatile in ways that often defy common sense and logic. Fear has driven people away from the markets. Without higher demand, there cannot be higher demand for shares and mutual funds. If people stay away from the stock market, investors will suffer.
The fear factor is also compounded by the demographic reality of retiring Baby Boomers who will be seeking, in very large numbers as they retire, to liquidate stock positions in favour of fixed return investments. When there are large numbers of sellers, you need equally large numbers of buyers to keep stock prices at the same levels. You need even higher numbers of buyer to increase demand to see those prices go up. Where will those large numbers of buyers come from? Demographers will tell you: They don’t exist!
The time to exit the stock market has probably already passed. Prolonging your exit is very risky, and dependent on somebody else’s enthusiasm for the investments you no longer want to hold.
On the other hand, investors in Dundarave have an investment in mortgages that have a clear and stated rate of return on investment at the time they are made. Investors and borrowers have clear understandings of the terms and the obligations. If the borrower defaults, interest and penalties accrue and if necessary, foreclosure proceedings are undertaken to protect your investment.
A MIC investment provides a constant and predictable rate of return. In that sense, they are much like a Bank Term Deposit or a Government Insured Certificate (GIC), except the return on investment is much better.
Diversification
Part of every good investment strategy should include different types of investments to reduce your exposure to the volatility associated with individual market segments, and accordingly protect your assets. Dundarave Mortgage Investment Corporation gives smaller investors a passive way to participate in real estate mortgage investing while minimizing risk and preserving capital.
Periodic Income
In accordance with our Investment Philosophy, Dundarave will only fund borrowers with a demonstrated ability to repay their loan. The sub-prime lending crisis in the United States was created by lenders who made loans to unqualified borrowers. In the current Lenders’ Market, only qualified borrowers will be funded.
This means that borrowers will be required to make regular, periodic payments of interest. This provides the steady income stream to the MIC that is paid out to Dundarave’s investors on a quarterly basis (or reinvested if so directed by the investor).
This makes Dundarave Mortgage Investment Corporation an ideal vehicle for retirees and others looking for steady, reliable passive income.
Professional Management
Dundarave Mortgage Investment Corporation has a team of experienced real estate professionals to guide and direct investment decisions. Day to day management is provided by Dundarave Management Ltd., the management of which has decades of legal and mortgage brokerage experience.
All details of the mortgage investments are handled by these professionals. Investors are secure in the knowledge their investment funds are being professionally managed and administered. This is an essential element to a truly “passive” investment.
