Defensive investing in a volatile market

by Kasi Johnston27 May 2020

Investment professionals are tasked with the challenging duty of helping their clients navigate unchartered financial waters in the wake of the COVID-19 pandemic. With stock markets continuing to flip flop as we try to make our way out of the crisis, investors are looking for ways to protect their assets.

Investing in a MIC or private mortgage is a viable, defensive strategy that investors should consider when we see this instability and lack of confidence in the markets. A key benefit to investing in MICs or private mortgages is simply the fact that mortgage investments backed by real assets are by default a more safe and defensive investment vehicle compared to owning real estate. Something else to keep in mind is that CMI predominantly lends to residential homeowners.

“We lend to people who own homes and live in them, as well as property investors, so there’s a high incentive to pay,” said Bryan Jaskolka, chief operating officer at Canadian Mortgages Inc. (CMI). “There’s historical precedent for Canadians to make their mortgage payments and certainly, government supports are helping people to do that today as well.”

Traditionally, MICs and private lenders have been a practical option for investors who were looking for exposure to real estate investments and cash flow lending but aren’t particularly interested in the hassle that typically comes with property ownership.

“Capital preservation also plays a significant role for these investors who are looking at income generation, but specifically from an investment that's backed by real security,” said CMI’s executive vice president, Elizabeth Wood.

Qualifying for a mortgage for an investment property, especially in this uncertain environment may not be the easiest feat. Jaskolka says these alternative investments don’t require qualification from an outside leverage provider. The MICs at CMI also consider investments anywhere from $5000, so first-time and retail investors all the way up to experienced and institutional investors can participate in one form of a mortgage investment or another. Another bonus with MICs specifically is that investors can use registered funds, essentially only paying tax on what you earn.

“If you use a dividend reinvestment plan (DRIP), there’s an opportunity to really grow that capital at a lower tax rate,” said Wood. With private mortgages, investors have the ability to use registered funds from their retirement savings or tax-free savings account (TFSA) to earn completely tax-free income.

MICs and private mortgages are a niche part of alternative investments, which have only started gaining popularity in recent years, but Jaskolka says the lack of awareness is not a reflection of quality. As more fund manager develop experience and knowledge to create more unique and stable funds, awareness continues to grow, and mortgage investments are being recognized as a safe, transparent way to invest, especially when run by a professional manager.

A big part of what makes a successful investment is already defined through due diligence and underwriting. CMI is one of Canada’s largest non-bank private lenders, servicing the mortgage brokerage industry and investors since 2005.

“Investors should be looking at the team behind the MIC. Look for underwriters with years of experience in market and investment analysis. They are the ones that ensure the opportunities are not only high quality, but that they're suitable,” said Wood. She adds that when issues arise, having a dedicated servicing team with financial and legal backgrounds and experience is what protects investor capital and defines the outcome.

At the end of the day, Wood says mortgage investments are especially beneficial for anyone looking to diversify their portfolio, and in doing so, mitigate risk. “This is a place where they can turn and use their own personal capital and continue to grow it even through the bad times.”

To learn more about how mortgage investing can be beneficial and practical in today’s challenging economic climate, download this free whitepaper by CMI.

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