Is it better to invest in real estate or in stock options like GICs, bonds and mutual funds? This is an age-old question. With the stock market as volatile as it is today, real estate makes for a relatively low-risk investment option. Real estate tends to lose little value in periods of rising prices. It holds its value and purchasing power during inflation, which is paramount in today’s unstable economy. Real assets hedge better than paper assets, as the former has intrinsic value whereas the latter does not, making real estate a better inflation hedge than stocks. One of the greatest benefits of investing in real estate is that your investment is secured by real property.
If for some reason, however, investing directly in real estate is not a feasible option for you at the moment, investing in private mortgages is an option that sophisticated investors use to diversify their portfolio and mitigate the risks of an unstable stock market.
Here are some of the major benefits to investing in mortgages:
It is a low-risk investment. Your capital is protected by the value of the real estate against which the mortgage is registered; therefore, your investment is secured by real property. Also, the value of the mortgage will not fluctuate like the stock market. Usually, the interest rates on mortgage investments are around six to 10 per cent, which is much better than stock market-based interest rates. With these combined aspects, you experience more assurance that your investment will achieve positive growth. In most cases, a mortgage generates positive cash flow every month. Because people fear losing their homes, borrowers are more likely to be prudent in paying back mortgages. In a worst-case scenario, if a borrower declares bankruptcy, your security remains unaffected.
There is also a market for private mortgages created by a special niche of borrowers. Bank mortgages can take up to 20 to 30 days to close. In some cases, for certain borrowers, this is far too inefficient; private mortgages can close in four to 10 days. Private mortgages will lend where banks won’t, allowing for a premium interest rate and a better return for private mortgage investors. Such situations include short-term loans or bridge loans (a bridge loan is a form of short-term financing for an individual or business until a more permanent source of financing can be obtained).
On top of this, demand for private mortgages has been increasing due to Ottawa’s tightening of Canada’s mortgage lending guideline. Ottawa has tightened the guideline four times since the 2008 recession. These changes directly affect borrowers as minimum down payments are being raised and amortization periods shortened.
For those new to investing in mortgages, there is an investment vehicle called a Mortgage Investment Corporation (MIC), which is proving to be a popular method to invest in mortgages. It offers a hands-off method to invest in mortgages. An MIC allows investors to pool their money to invest in property mortgages. MICs also have the option to borrow from a bank or other lenders to add to the investor capital pool and fund its mortgage portfolio. The MIC’s management team takes care of all the details, from sourcing suitable mortgage investments to managing administration details. All profits go directly back to investors as the MIC is a flow-through investment vehicle.
Apart from being investor friendly, there are other benefits to investing in an MIC. Since you are pooling money with other investors, in most cases, you do not need a lot of capital to get involved. Fees are inexpensive. Also, MICs are RRSP, RDSP, RRIF, RESP and TFSA eligible, so there are tax advantages.
When compared to unpredictable stock market returns, fixed interest rates in the range of six to 10 per cent from investing in mortgages sounds far more appealing. Especially when considering the benefits that a MIC yields, investing in mortgages can be a good way to take advantage of the power of real estate and at the same time supplement and diversify your investment portfolio.
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