With recent Bank of Canada rate increases, more people could potentially benefit from alternative investments. Alternative investments provide investors with different investment opportunities from traditional sources. If you’re researching alternative investments, you’ve likely come across Mortgage Investment Corporations (MIC) and Real Estate Investments Trusts (REIT), and you might be wondering what the difference is. At first glance, MICs and REITs seem similar. But, there are some key differences that you should know before you choose to invest in either a MIC or REIT.
What’s a MIC?
A MIC is a fund that lets you invest indirectly in the real estate lending market. Your capital buys shares in a company that acquires and maintains a portfolio of mortgages. Investors earn income without having to buy, manage, or finance a real estate property on their own. By pooling investors’ funds, MICs invest in private mortgages for borrowers that might need alternative financing sources than what is offered by traditional mortgage providers, like banks and credit unions. A MIC will flow through its taxable income to investors through monthly, quarterly, or annual payment distributions, depending on the MIC’s dividend policies.
What’s a REIT?
A REIT is a company that runs, finances, owns real estate and generates income. Investors purchase units and earn the income that’s produced from that investment. REITs pool investors’ funds to invest in real estate properties, usually income-generating properties like apartments, hotels, and infrastructure. Investors in a REIT earn income on their investments without buying, managing, or financing a real estate property.
Similarities
You’re probably thinking, “Wow, MICs and REITs sound the same.” Not quite, but they do have a lot in common! Both MICs and REITs are a form of alternative investment that deals in the real estate industry. They also pool investors’ funds through purchasing units (REITs) or shares (MICs). Plus, MICs and REITs may both provide portfolio diversification. Another significant similarity between MICs and REITs is that they both may flow through the profits as dividends directly to the investors, potentially resulting in minimal taxation on the profits.
Differences
Mortgages vs Physical Properties
One key difference between MICs and REITs is that MICs deal specifically with a portfolio of mortgages, and REITs manage or develop physical properties. MICs can’t manage or develop physical properties as REITs do. Mortgages have default risks, but they provide a more hands-off approach to dealing with real estate.
Public vs Private Trade
While there are both private and public REITs and MICs, REITs are more often traded publicly, while MICs are more often private lending companies. When it comes to publicly traded investments, this allows for more flexibility because they’re bought and exchanged on the stock market, which generally gets them more attention. MICs are typically not publicly traded, and liquidating investments is in accordance with retraction features. The value of publicly traded REIT shares may fluctuate more than non-publicly traded MIC shares that only calculate their net asset value periodically. The value of a MIC’s portfolio may be affected by the level of interest rates prevailing at such time.
Risk Management
Both MICs and REITs have risks and dividends that fluctuate. However, the way that risk is managed and calculated is different. MICs attempt to mitigate certain risks through a mortgage charge on the title for the underlying property, with a defined interest rate and short-term, typically 12-24 months; this generally means a flow of income to the MIC that is typically reliable but not guaranteed. Because REITs deal with physical property management, their profits depend on rental income or property value, which can fluctuate. This, in turn, typically causes dividends to fluctuate, too.
Despite their differences, MICs and REITs offer benefits, including diversified risk and a typically reliable flow of income. Alternative investments like MICs and REITs offer investors a variety of investment paths to go down. The most important thing when choosing an investment opportunity is being an informed investor. Investors should thoroughly understand and research their options before deciding which is better suited for them. As with any investment, it all comes down to the personal goals you have for your investments and your personal risk tolerance.
Are you interested in learning more about MICs and what Giavest Capital MIC can do for you? Get in touch with us today!
Giavest™ Capital Mortgage Investment Corporation is a Canadian exempt market product intended for distribution by way of Offering Memorandum only in those jurisdictions where it may sell securities through a registered exempt market dealer, and this information is not to be construed as an offer or solicitation for the sale or purchase of securities. There are no guarantees of future performance or dividends. Prospective investors should read the Offering Memorandum before making an investment decision.