Institutional Asset Management: How MICs and REITs Compare
There is often a lot of confusion about the difference between what is a MIC and what is a REIT. This article intends to explain some of the differences. However, both are good choices for institutional asset management.
Just like REITs, MICs, or Mortgage Investment Trusts are a kind of syndication that allows a group of individuals to pool resources to reduce risk and maximize income. However, MICs differ from Real Estate Investment Trusts, and that they are a tool that invests in mortgages secured by real estate, instead of than the real estate itself (this is what a REIT does, as do RELPs).
However, once again, just like REITs and MICs, mortgage investment trusts are an investment tool with a low obstacle to entry, and that also leaves unitholders with none of the responsibility of running the operation on a day to day basis.
A MIC investment also allows for the pooling of investor funds, and this is an important point. By working together, investors are able to pool smaller individual investments, and can accomplish a whole lot more by working together.
Like their companion investment vehicles, mortgage investment corporations are intended to provide stability for unitholders. In the case of MICs, this is done by investing in a diversified portfolio of mortgage loans. This method that the effect of possible defaults can be absorbed by the pool as a whole. Compare this to this situation of an individual investor investing in an individual mortgage that defaults – there is no protection whatsoever.
Plus, with a MIC, lending rates are locked in at the beginning of the contract, so changes in bank rates will not affect things for investors right away, at the minimum not until renewal dates.
Just like the typical Canadian REIT, MIC investors assistance from a strong management team. The managers take care of the day-to-day operations, set and execute lending strategy, obtain advantageous interest rates, and also administer capital and returns to unitholders. And, needless to say, the management team, instead of the individual investor, assumes all risk and limitations for the investment. It’s a win-win situation.
Another assistance of mortgage investment corporations is that they invest in mortgages, instead of in real estate. Although real estate is generally insulated from the fluctuations of the market and is a safe an stable bet, mortgages are considered to be already safer. No matter whether or not the value of the mortgage declines, the borrower must make predetermined monthly payments, and if there is a default, the MIC nevertheless can foreclose on the character.