Need a stable diversification in your portfolio? Then look no farther than MICs for a steady flowthrough of income.
Nick Kyprianou, CEO of RiverRock Mortgage Investment Corporation, believes the alternative fixed-income investment strategy is the ideal vehicle for higher returns than the bond market and more stability than equities. It’s eligible for TFSAs and RRSPs, and RiverRock’s offering is a diversified portfolio of high-yield Canadian residential mortgages.
A MIC (see definition below) can feature a variety of risk profiles, so investors must do due diligence in the same way they would when buying into companies.
RiverRock, which has a distribution agreement with Ninepoint Partners, focuses on residential, middle-class homes in suburban Ontario, with 98% of its book owner occupied. Kyprianou said this area is the lowest risk in the real estate sector and, because MICs are tax exempt, his fund can provide investors with an 8% return, 8.3% through the dividend investment programme.
The firm has only five or six houses worth more than $1 million, meaning its market is much larger from a strategy perspective and there is less of a swing in value than on, for example, a $3 million property.
Kyprianou, who has more than 30 years’ experience in the mortgage industry and was previously president at Home Trust Company and CEO at Equity Financial Trust, said this sector has also proven its resilience during a downturn, with people becoming more resourceful and taking on second jobs, for example. It meant, he explained, that when the market was doing terribly, the sector still did well.
He also urged investors and advisors to look closely at the management of a MIC.
“What is the experience level of that manager,” Kyprianou said. “Have they been in the industry a long time? Have they worked for a regulated institution before? Do they have risk or have underwriting experience? Do they have operational experience?
“A lot of these smaller MICs out there are producing a decent return but when you look at the managers, they have never been a lender before. A lot of them, predominantly, were just mortgage brokers and fell into this.”
He added: “When we underwrite the loan, we focus primarily on real estate. It’s got to be highly marketable, with a clear exit strategy. We have a philosophy that bad things happen to good people all the time – they get sick, lose their jobs, get divorced, things happen and we have to be able to deal with this and not suffer a loss.”
What is a MIC?
A MIC provides a way to invest in the real estate market, mitigating the time and risk of investing in individual mortgages. Investors pool their money by buying shares in a MIC, creating an alternative fixed-income investment. MICs are special companies created by virtue of Section 130.1 of the Income Tax Act, a federal statute, to enable investors to invest in a pool of mortgages. A MIC also borrows from a bank or other lender, employing both the shareholders’ capital and loan proceeds to fund its mortgage portfolio. The pool of mortgages is continuously managed, with newly invested share capital, and the proceeds of repaid and discharged mortgages, being utilized to fund new mortgages.
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