I got an interesting question the other day from Jason:
I’m thinking about investing in real estate, but I’m apprehensive because of the
potential real estate slow down. But would still like to “play” in the market.
Could you do a review of mortgage investment corporations like the one offered
by ACIC (http://www.acicinvestor.ca)?
Well first off Jason I will put out the disclaimer that I’ve never invested in an Mortgage Investment Corporation (MIC) so I have just some limited research on the topic done. Overall the general theme of the investment looks attractive on the surface.
ACIC been around issuing mortgages for 10 year now and doesn’t have a single default yet. In addition their share price has been steady at $1000 for years (it isn’t publicly traded) and they have averaged a 8% rate of return. The income from the fund is paid quarterly and is taxed as interest (but you can hold it in an RRSP). Mortgages are split between 1/3 commercial and the rest residential.
There are of course some issues. First off the minimum investment amount is $5000 or $20,000 if you want to hold it in an RRSP. So this type of investment isn’t for the small time investor. You have to tie up a fair amount of money into a single investment. The second issues is you can only cash out your investment quarterly and if you do it in the first two years you pay a 2% redemption fee. Another issue is they seem to be limited to mortgages in the BC and Alberta markets, so you aren’t well spread out over most of the country.
What strikes me the most about Jason’s question is he states he wants to invest in real estate. In this case your not invested directly in real estate, but rather investing in mortgages. ACIC doesn’t own any properties so it is more similar to a bank than a REIT. So it is important to note the difference depending on what you are looking for in your portfolio.
Given the average Canadian is typically over weight in banks and real estate in their net worth most of us don’t need something like this to invest in. Also because the payout is treated as interest it isn’t all that attractive from a tax preceptive unless you hold it in your RRSP. I would keep some thing like this as a limited part of any portfolio say around 5%. So given you would like something like this in your RRSP likely that means you would need a portfolio of $400,000 ($20,000/5%) to make this work.
So overall if you have a healthy size portfolio and you think that a MIC would work for you, sure go ahead and do some more research into it. For the rest of us, I would shelf the idea for now. I already own some BMO, I don’t really need another bank that just invests in mortgages in a limited area.