With the countless investment options available today, deciphering which one provides the best return potential can be overwhelming. Two popular investment strategies in the real estate sector are direct real estate investments and mortgage investment corporations. In this article, we will explore the similarities and differences between these two strategies, helping you make an informed decision when choosing your investment path.
What is a Mortgage Investment?
Mortgage investment is a type of investment vehicle where investors pool their money together to provide mortgages to borrowers. Investors can access this strategy through a Mortgage Investment Corporation (MIC), which involves lending funds to borrowers for mortgages in exchange for a return on investment. MICs in Canada are regulated by the Income Tax Act and offer various tax benefits to investors, such as deferral of capital gains taxes and dividend deductions. A MIC in Canada is typically managed by a portfolio manager who is responsible for selecting investments and maximizing returns.
What is a Real Estate Investment?
Direct real estate investment means buying a property outright, either with your own funds or through the use of financing. This type of investment involves purchasing a home, apartment building, office building, commercial property, or other real estate assets. It can also involve investing in other types of development projects, such as a rental property or flipping a house.
Key Differences and Benefits
1. Liquidity
Direct real estate investments tend to be less liquid than MICs, as selling the property can take time, and the value might not be realized immediately. Conversely, investing in a MIC often provides greater liquidity, as the investment can be more easily converted into cash through the buying and selling of the shares or units.
2. Diversification
Mortgage investments provide exposure to several different types of real estate projects since a MIC diversifies its portfolio by lending to multiple borrowers. On the other hand, direct real estate investment usually offers limited diversification unless a substantial capital investment is made across multiple properties.
3. Passive Income
MICs generate passive income through interest payments made by borrowers, which are then distributed to the investors as dividends. Direct real estate investment can also generate passive income through rental payments; however, this often requires ongoing management and maintenance.
4. Tax Advantages
Since MICs are structured as flow-through vehicles, they offer some tax advantages for investors. Any income made by the MIC is passed on directly to the investors, and the corporation itself is not taxed. On the other hand, income generated from direct real estate investment is subject to tax based on individual income tax rates.
Conclusion
When choosing between mortgage investment and direct real estate investment, it is crucial to weigh the merits of each strategy based on your personal circumstances, investment goals, and risk tolerance. Mortgage investments such as MICs in Canada can offer the diversification, passive income, and tax advantages, while direct real estate investments generally require a more hands-on approach and significant capital. Ultimately, the right choice depends on what best aligns with your financial objectives and investment preferences.
