A Mortgage Investment Corporation (MIC) and a Real Estate Investment Trust (REIT) may sound similar, but they’re actually quite different. They may have a few similarities that link them together, but knowing their differences will help you to decide which is right for you.
Both MICs and REITs are considered alternative investments and are, more specifically, pooled funds that deal with the real estate industry. A group of individual investors pool their money together to buy shares in something they otherwise couldn’t afford on their own. This style of investment is perfect for real estate and allows investors to own shares in a variety of properties, thus diversifying their investment portfolio more.
Another key similarity between MICs and REITs is that they allow investing companies to flow through the profits as dividends with minimal taxation if any. These dividends come from the profits or interest accrued in the fund and will flow through directly to the investors.
Although it may seem like MICs and REIFs are quite similar, they have some significant differences that set them apart. The biggest differentiator is where the money ends up going. With an MIC, your investment is placed in property mortgages. REITs, on the other hand, invest in physical properties — quite often income-generating properties such as apartment complexes, hotels, retail centres and infrastructure. Due to the fluctuation sometimes seen in the real estate market, investing in physical properties can carry a bit more risk.
MICs can’t manage or develop a tangible property like REITs; they can only deal with mortgages. Mortgages carry a certain amount of security as they’re a loan that a borrower is still required to pay back. They’re also not subject to as many unforeseen issues as physical property is.
Another key difference is how REITs are most commonly traded publicly, whereas MICs are private companies. There can be far more security when you invest with a company that’s skilled in a specific sector and dedicates all their time to that style of investment. However, you’ll find more flexibility with an REIT because it can be publicly traded.
When it comes to MICs and REITs, they can have some similarities that also differ. One such example is the percentage of property in each fund that must be Canadian-based. An MIC must retain 50% or more of its mortgages in Canadian properties in comparison to an REIT, which needs to maintain 75% or more.
Alternative investments provide investors with a variety of paths to choose from. Many of these choices can overlap, yet there are clear differences that can make the decision-making process for investors difficult. The choice between a Mortgage Investment Corporation and a Real Estate Investment Trust is an example of one of these situations. As with most investments, the decision ultimately comes down to your investment goals and your risk-tolerance levels. If you have more questions about MICs and how they can benefit your investment portfolio, get in touch with Jordan on our team today.