If you’ve looked for passive income from real estate in Canada, you’ve probably come across Real Estate Investment Trusts, Mortgage Investment Corporations and direct private mortgage lending. They can all seem similar. They are real-estate-backed and can provide steady cash flow. But they are actually quite unique.
Each asset gives you exposure to real estate income in a different way. Real Estate Investment Trusts (REITs) own properties and are landlords. Mortgage Investment Corporations (MICs) lend to a portfolio of borrowers. And direct lenders fund individual mortgages. The returns, risks and control levels are vastly different.
I have invested in all three asset classes. In this article I’ll explore how each of them works and how they compare. My name is Alexis Assadi, I’m an investor and private lender, and the founder of Assadi Private Capital.
How to invest in Canadian real estate
Before we dive in, let’s clarify the primary ways for Canadians to invest in real estate:
First, you can do so directly by either purchasing property or lending a mortgage.
Second, you can invest in a company that owns real estate.
And third, you can invest in a company that lends mortgages.
In this article I won’t talk too much into owning real estate directly. I think a lot of investors understand that concept. Today I’ll focus on REITs, MICs and direct mortgage lending.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts raise money from investors to buy, manage and sometimes develop income-producing real estate such as apartments, offices, malls or industrial properties. They give investors access to large-scale real estate ownership with professional management and regular income, without directly owning or maintaining property. They can provide diversification across many properties, locations and tenants, reducing exposure to single-property risk. Some specialize in a sector, like residential, retail or industrial, while others hold mixed-use portfolios.
To be clear, even though REITs are backed by real estate, investors don’t actually own the buildings. They own units in a company that owns them.
REITs earn revenue primarily through rent from tenants and can also gain from property appreciation over time. They are required to distribute most of their taxable income (typically 90% or more) to investors annually. They generally don’t reinvest profits. Distributions can consist of different income types: rental income, return of capital or capital gains. Each is taxed differently.
The largest REITs trade on the stock market, but private ones exist as well. Like any stock, publicly-traded REITs can fluctuate aggressively with interest rates, economic cycles and investor sentiment.
Management decisions, like how much debt they take on, property acquisitions and tenant mix, strongly affect REIT performance. Therefore, investors are placing their trust in the expertise of others.
REITs exist on the ownership, or equity, side of Canadian real estate. But investors can also participate in the mortgage lending market. Rather than owning and managing real estate, mortgage loans produce monthly interest. They are secured against the property. So if the borrower doesn’t repay the debt, the lender can take possession of the asset and sell it to recoup their funds.
Mortgage Investment Corporations (MICs)
People usually associate mortgage lending with banks. But tight federal banking regulations have created a large market for businesses and investors to step in, as well. A popular vehicle is the Mortgage Investment Corporation, or MIC. This structure pools investor capital to lend on Canadian real estate, primarily in short-term private mortgages. Banks, on the other hand, usually lend for the long-term.
MICs typically focus on time-sensitive financings, self-employed borrowers, people with credit challenges or unique deal structures. Basically the areas that banks can’t or won’t serve. They invest in first, second and third even mortgage positions. Since they target short term loans, usually between 6 and 24 months, they have an active portfolio turnover and flexibility to adjust to market conditions. Risk varies depending on loan-to-value ratios, loan type and security priority. MICs charge higher interest rates than bank loans and can potentially produce high returns for investors.
While some large MICs trade on the stock market, most are private corporations. One’s ability to cash out can be limited. Some MICs allow quarterly redemptions, others have lock-ups or notice periods. Liquidity is not guaranteed. While returns are often stable and uncorrelated with public markets, investors remain exposed to real-estate cycles, default risk and market liquidity conditions.
Like a REIT, investors in MICs are placing their trust in management. Compensation structures differ across the industry, so fee transparency and the alignment of management and investor goals are crucial to review. Loan underwriting quality, geographic focus and borrower exit strategy will significantly influence risk and performance.
Income earned by the MIC is taxable as interest income in the year it is received.
Private lending
MICs provide exposure to dozens, hundreds or even thousands of mortgages. But in Canada, investors can also lend money directly to borrowers, secured by mortgages. This is known as private lending.
As with MICs, the demand is primarily for short-term financing. A significant portion of the borrowing market is searching for quick capital injections, which they intend to repay by refinancing with a bank or selling the property. The borrower receives the loan and makes interest payments to the private lender. A mortgage is registered on the property’s title in the lender’s name. If the borrower defaults on the loan agreement, like a bank, the lender can foreclose on the property. This allows them to sell the real estate and recoup their funds.
Private lenders personally decide which borrowers, properties, loan amounts and terms to approve, rather than relying on fund managers’ decisions. They know exactly where their money is invested, the property securing the loan and the borrower’s repayment plan. They can choose conservative loan-to-value ratios, specific property types, and preferred geographic areas to match their tolerance. Private lenders control the loan terms. They determine the interest rate, fees and security, providing flexibility unavailable in standardized fund structures.
Unlike MICs or REITs, private lenders earn all of the available returns. There are no management fees or profit-sharing arrangements. As such, they can generate the highest profits. When private lenders hire a lawyer, mortgage broker or property appraiser to facilitate the transaction, those professional fees are included in the balance of the loan. So they are reimbursed by the borrower with interest.
Private lenders participate in the same market as Mortgage Investment Corporations. But they can also lend to small, time-sensitive deals that large lenders overlook. Lending $70,000 might not be worth it for a MIC, but it’s a serious investment for a lot of Canadians.
Importantly, private lenders can form long-term relationships with brokers, lawyers and borrowers. They can create repeat business and gaina deeper understanding of market dynamics that fund investors never gain. As with all investments, private lending requires due diligence in order to manage risk. There are free resources about Canadian private lending available to you at assadicapital.com/learn.
Summary
So let’s summarize the comparisons between real estate investment trusts, mortgage investment corporations and private lending. All of them provide real estate-backed cash flow, but in different ways.
When investing in a Real Estate Investment Trust, you own units in a company that owns real estate.
When investing in a Mortgage Investment Corporation, you own units in a company that lends mortgages.
As a private lender, you lend the mortgages yourself. You do what a bank does.
REITs benefit from rental income and property appreciation.
MICs and private lenders earn interest and fees from borrowers.
REITs and MICs offer no virtually control or say over investment decisions. Responsibility is delegated to management.
Private lenders have complete control over their lending decisions, with guidance from licensed professionals like lawyers, mortgage brokers and property appraisers.
REITs generally offer the highest level of liquidity.
MIC liquidity can be restricted, depending on the fund.
Private mortgages are not liquid. The loan is to be repaid on a fixed date.
In terms of returns, REITs and MICs are comparable. Investors can earn between 5-12% annually, depending on portfolio risk. Private lenders can receive over 15%. There is no dilution from management fees and the terms are agreed on directly.
The main risks associated with REITs is market and management risk, and property value fluctuations.
MICs are exposed to credit and management risk.
Private lenders can experience borrower default risk.
From a tax perspective, REIT distributions include rental income, capital gains and return of capital.
MICs provide interest income.
Private loans also provide interest income, but they can be held through corporations and taxed at a lower rate. This is usually best when there are several income streams.
All of these assets can be held through registered accounts, like RRSPs and TFSAs.
Regarding how to invest, REITs and MICs can be purchased through investment dealers, either through online brokers, advisors or exempt market dealers. Private loans are usually facilitated through mortgage brokers with the assistance of legal counsel. While all three methods require due diligence, private mortgage lending usually requires more up-front work. That’s the nature of having more control over the asset. After the deal is done, it can be a passive investment.
REITs and MICs provide the best diversification. Investors can gain exposure to thousands of rental units and mortgages. Private lending is concentrated in specific loans. It can be diversified across deals manually.
REITs and MICs both produce financial statements each year that investors can review. They will also generally aggregate data and provide broad updates. Private lenders have a higher degree of transparency because they know the exact borrower, property and terms.
| REIT | MIC | Private Lending | |
| What You Own | Units in a company that owns real estate | Units in a company that lends mortgages | Personally-loaned funds secured by a mortgage |
| How You Earn | Rental income and potential property appreciation | Interest and fees from a pool of mortgages | Interest and fees from individual loans |
| Control | None | None | Full |
| Liquidity | High | Limited | Low |
| Returns | Moderate | Moderate | High |
| Risk | Market and management risk; property value fluctuations | Credit and management risk; real-estate cycle exposure | Borrower default and property risk; mitigated by security and LTV |
| Taxes | Include rental income, return of capital, capital gains (each taxed differently) | Interest income in year received | Interest income in year received, but can be held in a corporation |
| Method | Securities delers | Securities delers | Mortgage brokers and lawyers |
| Diversification | Usually diversified across many properties and tenants | Diversified across many mortgages | Concentrated in specific loans (can be diversified across deals manually) |
| Transparency | Moderate – financial statements and disclosures | Variable – depends on MIC’s reporting | High – you know the exact borrower, property, and terms |
Learn more about becoming a Canadian private mortgage lender
As I mentioned at the start of this article, I have invested in all three assets. Over the years I’ve come to appreciate private lending the most and now do it professionally. I issued my first loan way back in 2013. My company is called Assadi Private Capital, Inc.
If you want free information about how this market works, how to actually do it and how you can improve your private lending skills, visit assadicapital.com/learn. I have articles, videos and courses available there.