When it comes to real estate investing, most investors try to climb the real estate ladder by becoming a landlord first, then dealing with the hassles of legal issues, tenancy, and maintenance. Though, this is not the only way to start. Real estate mutual funds, such as Mortgage Investment Corporations (MICs) and Real Estate Investment Trusts (REITs), offer an investment alternative to investing in real estate as an investor.

A mortgage investment corporation (MIC) and a real estate investment trust (REIT) may sound similar, but they are quite different. They have some similarities, but knowing the differences between them can help you decide which one is right for you.

MICs and REITs

Although REITs and MICs both fall under the real estate asset class, many differences exist that investors should be aware of. First, let’s define what they are.

REITs

Owning income-generating property is a sound investment strategy, but being a landlord comes with its own set of challenges. A REIT allows investors to be freed from the hassles of managing the day-to-day business of owning real estate. REITs offer a low-cost way to own real estate and typically generate monthly income from rental properties. This income is distributed to investors as dividends.

  • The board and trustees manage the REIT.
  • A REIT cannot have more than 50% of its shares owned by more than 5 people.
  • REITs must generate 75% of their gross income from real estate-related sources.
  • REITs should have at least 100 investors after the first year.

MICs

A Mortgage Investment Corporation (MIC) has many advantages. It gives first-time investors a more accessible, passive way to enter the mortgage investment space. MICs free investors from administrative tasks by pooling funds to access real estate-backed mortgages collectively.

Residential mortgage loans are MICs’ primary sector, as regulated by the Canadian Income Tax Law. MICs must invest at least 50% of their assets in Canadian real estate mortgages or insured deposits (including credit union deposits).

  • MICs can use financial leverage through debt.
  • Financial statements should be audited.
  • No shareholder can hold more than 25% of MIC capital.
  • MICs should have more than 20 investors.
  • MICs can invest up to 25% in Canadian real estate, but cannot develop or manage land.

Differences Between MICs and REITs

Although MICs and REITs may look similar, some key differences distinguish them. For example, a MIC must invest at least 50% in Canadian mortgages, while a REIT must derive 75% of income and benefits from real estate sources.

The Biggest Difference: Where the Money Ends Up

With a MIC, the investment is in mortgages. REITs invest in physical, income-generating properties such as apartments, hotels, shopping malls, and infrastructure. MICs cannot manage or develop physical properties, but instead handle mortgage loans which offer more predictable returns and fewer surprises than managing real estate.

REITs Are Public, MICs Are Private

REITs are most commonly publicly traded, allowing for liquidity and flexibility. MICs are often private companies that operate more conservatively and focus on lending rather than owning property. Choosing a company experienced in a specific sector can provide added investment security.

Similarities Between MICs and REITs

Both MICs and REITs pool funds from investors and focus on the real estate sector. This group investing model allows individuals to gain exposure to assets that would be hard to access individually. It also provides a more diversified investment portfolio.

Another similarity is that both MICs and REITs pass on most of their profits to investors with minimal taxation. These profits are paid as dividends derived from rental income or interest from mortgages.

Alternative investments like these offer flexible options, but they come with key differences that can make decisions complex. Choosing between a MIC and a REIT depends on your goals and risk tolerance. If you need expert guidance, contact the Canguard team.