How to Earn 14% P.A. By Investing In Canadian Private Mortgages? Strategy, Guide, Pros, and Cons

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Beating inflation. Beating the market. Earning more than the average – Sounds like every Canadian’s dream. But do you know, it is possible? Private Mortgage investing is a popular alternate investment avenue. You can invest in the mortgage sector and earn returns between 10% and 14%.

Private Mortgage Investing in Canada

As an average Canadian, you can individually invest in the mortgage sector. You are neither required to obtain any license nor do you need to be a business or corporation.

In Canada, there are several Mortgage Investment Corporations (MIC). These corporates are specifically incorporated to attract and pool funds from individual mortgage investors. Some popular MICs in Canada are – Atrium Mortgage Investment Corporation, MCAN Mortgage Corp, and Timbercreek Financial, etc.

The MICs invest the proceeds in the mortgage sector, which includes:

  • Retail lending
  • Commercial term and Bridge Financing
  • Construction and Mezzanine Financing
  • Land and Development Financing, etc.

The portfolio of a MIC is diverse and includes all types of mortgages on both commercial and residential properties. These organizations collect money from private investors and invest in the mortgage sector. In return, the investors get dividends based on the yields generated by the MIC.

How does a Mortgage Investing Corporation earns by investing in real estate?

For example, Atrium MIC collected funds from the public and invested in its new low-rise residential project. Whatever the company earns, is passed on to the investors as dividends after deducting operating and administrative expenses.

How does it happen?

Step-by-step flow of how you earn returns from MIC

To do private mortgage investing:

  • You are required to buy shares/ units of the MIC
  • By doing this, you will become a shareholder
  • The MIC will invest the collected funds in its various real estate projects
  • The generated returns will be distributed to the shareholders as dividends

It must be noted that a MIC is a flow-through investment vehicle. It is obliged to distribute 100% of its net income to the shareholders.

Pros of Private Mortgage Investing

  • MIC shares are a qualified RRSP and RRIF investments
  • You can generate higher returns
  • Safe investment as MICs prefer to invest in less risky real estate
  • Regular and fixed dividend income
  • Fewer chances of fraud as a MIC is required to make audited financial statements every year

Cons of Private Mortgage Investing

  • Less liquidity when you invest in unlisted MICs
  • Even though investment in the mortgage sector is safe, still an economic recession can make it difficult for mortgage borrowers to pay monthly payments
  • A few MICs chase higher returns and invest in risky mortgages
  • You cannot control the property in which a MIC will invest
  • The MICs deduct operating and administrative expenses

How to Choose the best MIC?

Choose MIC that offers safe and high returns

  • Residential mortgages are safer when compared with commercial mortgages. Thus, look for the MICs that have a larger portfolio of residential properties
  • The MICs with a lower average LTV ratio are the safest due to lesser default risk
  • Go with the MICs that have lower administrative and operating expenses. This way, you will get higher dividends

Major MICs in Canada

Particulars Atrium MCAN Timbercreek
Ticker Symbol TSX: AI TSX: MKP TSX: TF
Focus Residential and Commercial Mortgages ·         Uninsured residential mortgages

·         Residential construction loans

Commercial mortgages
Average LTV Ratio 61.40% 61.50% 68.20%
Residential Mortgages (% of Portfolio) 80% 96% 50.10%
Commercial Mortgages 20% 4% 49.90%

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