What is a Mortgage Investment Corporation?
A Mortgage Investment Corporation (MIC) is an investment vehicle that pools money from investors to purchase mortgages. These mortgages can be used to purchase or renovate residential or commercial properties, or to provide short-term loans to borrowers. The MIC then earns a return by charging interest on the loans, or from profits generated by the sale of the property. MICs are regulated by the provincial governments in Canada, and the rules and regulations vary across the country.
Mortgage Investment Corporations are generally structured as limited partnerships, with the MIC acting as the general partner and the investors acting as the limited partners. The MIC is responsible for selecting and managing the mortgages, and the investors provide the capital. The MIC is also responsible for providing the investors with periodic reports on the performance of the investments.
Benefits of Investing in Mortgage Investment Corporations
Investing in a Mortgage Investment Corporation provides investors with several potential benefits. First, MICs tend to offer higher returns than traditional investments such as stocks and bonds. This is due to the fact that mortgages tend to have higher interest rates than other investments, which allows the MIC to generate larger profits. Second, MICs are considered to be relatively low risk investments since the underlying assets are secured by real estate.
In addition, MICs are often tax-advantaged investments. Generally, the interest payments from the mortgages are treated as regular taxable income, and the profits from the sale of the property are treated as capital gains. This means that investors can benefit from favourable tax treatment when investing in MICs.
Risks of Investing in Mortgage Investment Corporations
Despite the potential benefits of investing in a Mortgage Investment Corporation, there are also some potential risks. First, MICs are highly leveraged investments, meaning that they involve taking on a large amount of debt to purchase the mortgages. As such, the MIC may be exposed to a greater risk of default if the underlying mortgages are not paid back. Second, MICs are subject to the same market forces as other investments, and can be affected by changes in interest rates and the overall economy.
Finally, MICs are relatively illiquid investments. This means that investors may have difficulty selling their shares in the MIC or cashing out their investments. As such, investors should be aware of the risks associated with investing in a MIC before committing their capital.
Regulations for Mortgage Investment Corporations
Mortgage Investment Corporations are regulated by the provincial governments in Canada. Each province has its own set of rules and regulations that govern the operations of MICs, and investors should familiarize themselves with these regulations before investing in a MIC. Generally, MICs are required to register with the provincial securities regulator and provide periodic financial reports to the regulator and investors.
In addition, MICs must comply with certain standards when selecting and managing mortgages. These standards are designed to protect investors and ensure that the MIC is operating in an ethical and responsible manner. For example, MICs must adhere to certain lending standards when selecting and evaluating mortgages, and must ensure that investors are provided with adequate disclosure about the investments.
Conclusion
Mortgage Investment Corporations can be a profitable and relatively low risk investment for investors who are willing to take on the risks associated with real estate investments. However, investors should understand the regulations that govern MICs and the risks associated with investing in a MIC before committing their capital.