What are the options available to investors in the Real Estate Asset Class?

Within the Canadian real estate investment space, there is an array of great products that individual investors have the opportunity to invest in, aside from owning rental properties. There are a number of choices your client has to consider when thinking about making a real estate investment. MICS, REITS and Syndicate Mortgages are all terms that are not likely foreign to anyone reading this magazine. But do we fully and truly understand the differences between each investment structure? We know that they are all real estate investments and that they all seem to have great terms, returns, assets, managers etc. but what separates these types of investments from each other? Let’s look at the way these are structured to determine what the differences are between them, the different merits and risks involved and ultimately which ones are better for your clients, because we all know that certain investments work for one client, but not for another.

Mortgage Investment Corporation or MICs

While attempting to exercise a referral to a real estate investment, have you ever heard a client say “I already invest in real estate, I just purchased a MIC.” Did they directly invest in real estate? Or did they invest in more stocks? So how does a MIC work exactly, does the client truly understand what is generating those returns? MICs have been around since 1973 when federal legislation was enacted to promote private financing and make it easier to invest in mortgages. Most of you are likely aware that a MIC is an investment company that is designed specifically for mortgage lending, primarily residential and commercial. This investment structure allows investors to pool their funds together in the MIC and the managers of the MIC loan the pooled funds out to people or companies that can’t access a traditional mortgage. The types of properties involved could include apartments, condo developments, malls and other commercial buildings. When then money is lent out to the borrower (i.e. the developer or project management company) the terms of the lending contract are highly defined, much like all mortgage contracts. The interest payments that are made on that mortgage are flowed through back to the investor and that’s how the cash flow or income from the corp. is generated.

MICs are managed by the best in class asset managers available. When an investor makes an investment into a MIC, the investor is ultimately investing into the knowledge and abilities of the fund’s manager. The investor is banking on the manager to find quality properties and quality developers to invest in to generate a solid consistent return for them. One of the other attributes about a MIC is that they are typically publicly traded. This means that the investor has liquidity or the ability to ‘get out’ of the investment if they decided that they no longer wish to participate in this type of investment. Finally the disclosure that is available for the clients is first rate. Since this is a publicly traded company there are obviously rules that the MIC must follow. So at the end of the day the client is able to see exactly how much money the MIC has made, as well as all of the operating costs and fees associated with their investment. Now this all sounds great so far right? What are some of draw backs that people could experience when investing into a MIC? What if the individual investor wants to participate only in certain properties or if the client wants the ability to have some say in which properties they want to invest in. well unfortunately in MICs, the manager of the corp. selects the property on their behalf, whereas in some syndicate mortgages, investors have the flexibility to invest in a desired project. This can be considered a strength or weakness of a MIC, depending on how you look at it.

One of the main focuses of a MIC is to lend privately, thus not using conventional metrics to lend funds. Often developers or individuals who cannot access bank mortgages often apply for higher rate mortgages via a 3rd party or a MIC? This is how the MIC’s are able to either provide substantial returns (by getting more interest for their $) or experience higher default rates because they lend to parties that may not always be able to service the mortgage debt. This creates volatility within the MIC. Again, it’s all about risk and reward.

Real Estate Investment Trusts or REITs

REITS are another form of real estate investing, or are they? As you may or may not know, REITs are companies that own and typically operate income producing real estate properties such as: commercial real estate, hotels, hospitals, apartment buildings, warehouses and shopping centres. There are private REIT companies and public REIT companies. Public REIT companies offer stock in their companies for sale to investors in the public market, ie the stock market.So when you invest in a REIT it’s much like investing in the equity market where you purchase shares in a company. Except in this case the driver of returns is the leasing or sale of real estate assets held by the REIT; whereas in the typical equity market, investors profit from increased corporate revenues.Much like MICs, REITs are offered for sale on the stock exchange thus making them a liquid investment. This means that at any given time an investor who wishes to no longer own their shares in the REIT can sell them at the current valuation of the stock on the index. So if you have a client that says they are invested in real estate, make sure that they understand that in the above cases they are actually invested in companies that invest in real estate, they themselves are not directly invested into real estate.

Syndicate Mortgages

In a Syndicate Mortgage, investors can invest directly into real estate. This investment structure is rather simple. I’m sure that many of at some point in your lives either have or have had a mortgage. Where you put down a certain amount of collateral like 20% and the bank lent you the remaining amount to acquire your home. Well a syndicate mortgage moves and acts very much the same way. In a syndicate mortgage investors become the lender to a developer to build their desired complex. It could be a high rise condo, low rise single family development or a commercial complex. There are a couple unique features that a syndicate mortgage possesses. The first of which is that a syndicate mortgage allows investors to select which projects they wish to invest in (one of the key difference between MICs and Syndicate Mortgages). If the investor feels more comfortable with commercial properties over residential properties then the client has the ability to select this. Another unique feature about Syndicate Mortgages is that… just like when you purchased your home, there were 2 names at the land registry office on title for your property; your name and your financial institutions. Syndicate Mortgages have the same functionality because each investor is registered on title as a charge holder against the property. This feature gives the investor added security to their investment. Much like if you neglected to make a mortgage payment on your own home, the bank would likely call you to remind you that youowe them money, then if you missed another, the bank might send a letter. If you miss a third one, they may send a person by the house asking you to get out of their house. Syndicate mortgages allow for the same fall-back scenario if a lender neglects to service the debt. A number of risks are associated with syndicate mortgages, the first of which is common amongst other real estate investment types: liquidity. Since you are the lender in a mortgage, you have a contract between yourself and the borrower.

Typically the borrower will agree to pay you a steady interest rate and repay the full amount of the loan borrowed on a specific date. Some other risks associated with all types of development investments: what of the project runs out of funds and cannot service the debt load, or what of the project doesn’t get its required permits or zoning or the end result of the built project might not meet expectations financially. If any of these three things happen, this is where you can act on your legal right as a charge holder against the land. If the borrower is not meeting the terms agreed upon in the mortgage contract you can force them into foreclosure and sell the property to regain your capital. This is where it is important to understand who you are lending the money to, because this is obviously not an ideal scenario.

So when you have a client that wants to invest in real estate, make sure that you understand the differences between the many options available in the market place. And of course, if you have an investor that wants to invest directly into real estate, be sure to introduce them to Syndicate Mortgages.

Josh Will

As an expert in real estate investments, I bring a wealth of knowledge and hands-on experience in navigating the various options within the Canadian real estate asset class. My expertise extends to Mortgage Investment Corporations (MICs), Real Estate Investment Trusts (REITs), and Syndicate Mortgages, providing a comprehensive understanding of the nuances within each investment structure.

Let's delve into the concepts mentioned in the article:

  1. Mortgage Investment Corporation (MIC):

    • A MIC is an investment company tailored for mortgage lending, focusing on both residential and commercial properties.
    • Investors pool their funds in the MIC, which then lends money to individuals or companies unable to access traditional mortgages.
    • Managed by skilled asset managers, MICs are typically publicly traded, providing liquidity to investors.
    • Returns for investors come from interest payments on the mortgages, and the MIC's performance is directly linked to the quality of the properties and developers chosen by the fund's manager.
    • Drawbacks include a lack of investor control over property selection, potential higher default rates due to non-conventional lending metrics, and volatility within the MIC.
  2. Real Estate Investment Trusts (REITs):

    • REITs are companies that own and operate income-producing real estate properties, including commercial real estate, hotels, hospitals, apartments, warehouses, and shopping centers.
    • Public REITs offer shares on the stock market, providing investors with the opportunity to invest in real estate without direct ownership.
    • Returns are driven by the leasing or sale of real estate assets held by the REIT.
    • Like MICs, REITs are liquid investments, allowing investors to sell shares at any time.
  3. Syndicate Mortgages:

    • In a Syndicate Mortgage, investors directly invest in real estate projects.
    • Investors act as lenders to developers, financing the construction of various projects, such as high-rise condos, low-rise developments, or commercial complexes.
    • Unique features include the ability for investors to choose specific projects and being registered as charge holders against the property, providing added security.
    • Risks associated with syndicate mortgages include liquidity, potential project funding issues, permitting or zoning challenges, and the possibility of the project not meeting financial expectations.
    • Investors can exercise their legal rights as charge holders, including foreclosure, in case the borrower fails to meet the agreed-upon terms.

In summary, each real estate investment option has its distinct characteristics, merits, and risks. Understanding these differences is crucial in guiding clients to choose the investment that aligns with their financial goals and risk tolerance.

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