Whereas a Mortgage Investment Corporation (MIC) acts as an aggregator and manager on the investor’s behalf, on a passive and pooled basis, individual mortgages require more investor involvement.
“When you are buying a specific mortgage, they come in all shapes and sizes, locations, risk factors, credit scores, and income criteria,” say Bryan Jaskolka, VP of Canadian Mortgages Inc. (CMI). “When an investor purchases a specific loan, they feel every positive or negative that comes from that investment and is not insulated in the same way as with a MIC.”
First and second mortgages tend to have different risk profiles and, generally speaking, second mortgages are smaller than first mortgages. There are, however, no set rules and it’s not uncommon to see very large second mortgages, especially in urban markets with expensive housing stock. Although the common consensus is that second mortgages are riskier and, therefore, more lucrative, some first mortgages can provider higher returns than second mortgages, and some second mortgages may have outstanding equity behind them which represent a lower risk investment than a higher risk first mortgage.
Individual first and second mortgage investments have historically been best suited to investors with a significant amount of liquid capital to acquire multiple investments. In effect, these investors build their own mini-MIC as opposed to buying into one.
“If an investor buys six or seven mortgages, they will likely have a different set of maturity dates and get some location diversification,” Jaskolka says. “With our program, the investor’s name is placed on the title of the property (as opposed to buying a share in a MIC), which some investors perceive to be more secure. Another upside is they have more visibility on the investments and have complete control on which investments they buy.”
In some cases, the returns from those mortgage investments may be higher because the investor is not forced to pay any overhead or management costs. There are obvious advantages for those with enough capital to buy individual mortgages, however, if a particular mortgage investment suffers a loss, the investor is responsible for all of that. It’s also not guaranteed that the type of mortgage the investor is looking for will be available when the investor is ready to make their move.
“That can result in the investor waiting for a suitable investment and, during that period of time, their funds are not earning cash flow,” Jaskolka says. “Whereas, with a MIC, when they are invested the money is always earning. Sometimes, an 8% return in a MIC could end up netting the same income as a 9 or 9.5% mortgage investment target over the year.”
Finding investment opportunities that are personalized to an investor’s specific goals should be a top priority in today’s climate. In the modern market, increasing numbers of investors are reaping the benefits of making investments in individual mortgages. Providing a flexibility and rate of return that traditional investments struggle to achieve, private mortgages investments represent a great opportunity for the modern investor who wants to diversify.
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