How to Invest in Private Real Estate Investment Vehicles Webinar

Rewatch a 20-min conversation about getting started in passive real estate investing and how you can take the step into building your portfolio. Luan Ha, CEO of Fundscraper, and other experts on our team will be discussing how to successfully invest in private real estate investment vehicles along with a Q+A session to answer any questions you may have.

Grab a coffee and join the conversation to put forward any questions or challenges you have.

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How to Generate Passive Income in Canada

Novice investors often tell us that real estate investing sounds too intimidating. When we explain how Fundscraper lets you invest as little as $5,000, they tell us it sounds too good to be true. It’s not—we promise! The truth is, real estate investing is a realistic, achievable way to expand your income sources and make passive income. We put together an overview of seven ways to get started. Which one sounds right for you?

Key Points

  • One of the most common methods of earning passive income is through the ownership of financial investments like real estate.
  • Mortgages are the most common and significant type of debt held by Canadians. Approximately 40% of Canadians have a mortgage.
  • Unlike REITs, where your investment is placed in physical properties, with a MIC, your investment is placed in property mortgages.

What is Passive Income (Canada)? 

Income can be divided into two main categories: Active and Passive. Active income is earned by exchanging services — including wages, taips, salaries, and business income — for money. Passive income is divided into two subcategories: real estate and portfolio income. Unlike active income, passive income requires little to no involvement in the generation of income and is typically earned on an ongoing basis.

What is Passive Investment Income (Canada)?

Passive investing is one of the most common strategies for increasing your income, growing your investment portfolio, and building a healthy nest egg for the future. We’ve compiled a list of ways real estate can help you generate passive income to achieve your investment goals.

One of the most common methods of earning passive income is through the ownership of financial investments like real estate.

How to Make Passive Income in Canada

Here are even some real estate passive income ideas (Canada) to get you started.

  1. Real Estate Investment Trusts (REITs)

REITs are one of the most popular real estate investment vehicles amongst Canadians. They’re trusts that passively hold interests in real property, with at least 75% of the trust’s revenue coming from rent or mortgage interest from Canadian properties, as well as capital gains from the sale of such properties. Modelled after mutual funds, REITs are the next closest thing to owning real estate and finance a wide variety of buildings, including many shopping malls, office buildings, and apartment complexes.

Unlike traditional mortgages, REITs offer broad diversification with both equity and debt investment opportunities. A downside to this investment opportunity is lack of transparency and control on your investment because investors cannot choose which real estate assets their investment goes into.

  1. Unit Trusts

By investing into a unit trust, your investments are handled by a fund manager who uses their expertise to invest your money into a portfolio of assets. At Fundscraper, this is our bread and butter, with the Fundscraper Property Trust (FPT) offering Canadians the opportunity to invest in pooled mortgages.

Pooled Mortgages consist of one or more mortgages that offer a similar return and loan-to-value ratio, meaning that you can invest in numerous mortgages that align with your risk appetite through one transaction.

 

  1. Mortgage Investment Corporations (MICs)

MICs offer investors an opportunity to pool their money and buy shares in their MICs. Since they invest directly in mortgages rather than property, MICs are less susceptible to the same unforeseen issues that may arise in physical properties. Additionally, a MIC may invest up to 25% of its assets directly in real estate, but may not develop land or engage in construction, and must have at least 20 shareholders. 

MICs offer investors an opportunity to pool their money and buy shares in their MICs. Since they invest directly in mortgages rather than property, MICs are less susceptible to the same unforeseen issues that may arise in physical properties. Additionally, a MIC may invest up to 25% of its assets directly in real estate, but may not develop land or engage in construction, and must have at least 20 shareholders. 

Unlike REITs, where your investment is placed in physical properties, with a MIC, your investment is placed in property mortgages.

  1. Mortgages

Homeownership allows you to build equity. And, depending on the local market conditions, real estate may appreciate. Investing in a mortgage, especially someone else’s, means you’re taking on the role of a lender and the borrower must repay the loan with interest, usually monthly. If chosen properly, these monthly principal and interest payments can offer a steady, predictable stream of passive investment income.

Mortgages are the most common and significant type of debt held by Canadians. Approximately 40% of Canadians have a mortgage.

Start Investing in Real Estate Today

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  1. Real Estate Syndications

When you invest your money into a syndicate mortgage, you become a secured lender and are recognized as a part-owner of the mortgage. You’re not investing in a fund; instead, two or more investors are investing in one specific mortgage, pooling their resources together to own a “piece of the pie.” Investors hold in proportion to what they contributed. In real estate syndications, passive investors don’t have to be actively involved in property management, accounting, or tenant-related issues.

One of the benefits to real estate syndications is the potentially high returns, including annual passive income and a profit on the sale of the property. A downside to real estate syndications is the barriers to entry, as the minimum investment for most offerings is $25,000. Syndicate members are expected to be sophisticated mortgage investors as they are not relying on the efforts of anyone else for a return on their investment.

One of the oldest real estate “plays” is buying an additional property to earn money and extra income.

  1. Real Estate Crowdfunding

Similar to syndications, real estate crowdfunding is when a group of individuals pool their capital together to purchase real estate. Real estate crowdfunding uses the internet and social media platforms to reach potential investors.

The main reason that many people opt for real estate crowdfunding is that it doesn’t require a large amount of money to start. You can invest as little as $1,000. Unlike REITs, with crowdfunding, you’re investing in properties directly and can choose which properties you would like to invest in. Moreover, real estate crowdfunding helps investors to expand the risk in their portfolios by not having their entire funds in the equity market.

  1. Buying Income Producing Properties

Whether it’s buying a student house in a university town or renting out a duplex in a residential area, owning a property can be lucrative, but typically requires lots of planning, management, and a large down payment. Standard bank financing will typically top out at 75% loan-to-value. While property management isn’t for everyone, for the few willing to do the homework, owning and managing an income property can complement an investment portfolio geared to generate income.

How to Maximize Generating Passive Income in Canada

Real estate investment is an excellent way to build passive income streams, grow your investment portfolio, and build a healthy nest egg for the future. Done right, it doesn’t have to take a lot of time and energy. There is, however, an added risk. As a result, this strategy isn’t for every investor. Understanding that everyone has different preferences, needs, and risk tolerances, we recommend consulting with a financial advisor before you decide whether or not to invest in passive income assets. It’s time to expand your income sources and make real estate investing your new side hustle!

How to Analyze REITs

The following article will walk you through why investing in real estate investment trusts are advantageous, the different types of REITs, pros and cons of this investment vehicle and finally how to analyze each trust to ensure it’s a good fit for you and your investment goals. 

Key Points

  • Real Estate Investment Trusts are the lowest-maintenance way to dip your toe into real estate investing. Modelled after mutual funds, REITs are trusts that allow you to passively hold interest in real estate. 
  • REITs allow investors, such as yourself, to participate in owning income-producing properties that otherwise may have been inaccessible to the average Joe.
  • To get into the nitty-gritty, at least 75% of the trust’s revenue must come from rent or mortgage interest from Canadian properties, as well as capital gains from the sale of such properties. 

Not too long ago, I opened a new so-called High-Interest Savings Account that’s earning me 0.010% on my hard-earned cash. 

Now don’t get me wrong, the name has a very poetic ring to it, but sheesh – you know it’s not great when you have to go down to four decimal places to learn how the bank plans to grow your money!

Like so many Canadians, I knew that while this account would bring me 100% security, it wouldn’t get me very far in terms of financial growth and my long-term plans. And so, my personal financial horizons had to expand to include stocks, bonds, mutual funds, real estate, GICs, EFTs and whatever other combinations of the alphabet the financial sector could throw at me.

At Fundscraper, we firmly believe that as an intelligent investor (which we know you are because you’re doing your homework right now), diversification is key. And part of a well-diversified portfolio includes investing in real estate.

While there are an amplitude of ways to invest in the real estate market (you can read an overview here), one of the most popular among Canadian investors are Real Estate Investment Trusts, also known as REITs (another acronym for you to file away in your memory). 

Here’s Why You Should be Investing in Real Estate Investment Trusts

Real Estate Investment Trusts are the lowest-maintenance way to dip your toe into real estate investing. Modelled after mutual funds, REITs are trusts that allow you to passively hold interest in real estate. They allow investors, such as yourself, to participate in owning income-producing properties that otherwise may have been inaccessible to the average Joe.

REITs come in many shapes and sizes and often hold interest in specific forms of property, whether it be apartment complexes, office buildings, shopping malls or industrial spaces – spreading your investment over multiple properties and across many regions. Simply put, they aggregate capital from investors, which they then use to acquire, build, operate and/or update these properties. 

To get into the nitty-gritty, at least 75% of the trust’s revenue must come from rent or mortgage interest from Canadian properties, as well as capital gains from the sale of such properties. 

When you invest in a REIT, the Trustees of the REIT hold the legal title to manage the trust on behalf of the unitholders (you), so no decision making is required on your part. These Trustees have a fiduciary duty and the income that is earned by the trust is passed onto the unitholders. 

REITs pay out almost all of their taxable income to shareholders, which makes their dividends attractive. The average Canadian return on a REIT is around 4% – that’s 400x higher than that “high interest savings account” we talked about earlier.

Bottom Line: REITs work in a similar fashion to how an investment property (such as owning and renting out a single-family home) earns rental income. However, unlike owning a rental property, REITs help you avoid the headache of property management, and best of all they trade on the stock exchange, making them more liquid than traditional real estate.

Types of REITs

Now that you know how REITs work, let’s explore the different types of REITs that you can invest in. 

Equity REITs

When most people talk about REITs, they’re talking about equity REITs.

Equity REITs derive most of their revenue from rent collection and from the sale of the properties they own. These REITs tend to specialize in owning certain types of buildings such as apartments, malls and/or resorts. Because a majority of their revenue is generated through rent collection, it’s fairly straightforward to calculate their payouts, providing relatively stable income to their unitholders.

Equity REITs, however, tend to be more sensitive to recessions and booms, often following the cyclical nature of the stock market. Like most markets, they are susceptible to swings in supply and demand, where too much supply can lead to lower rental income, in turn lower payouts for investors. 

Mortgage REITs

Just to make things confusing, mortgage REITs are also sometimes called mREITs or debt REITs. However, regardless of the naming convention, they offer their own set of benefits.

Unlike equity REITs, mortgage REITs make loans secured by real estate, but do not own or operate the properties themselves. By providing financing for these income-producing properties, mortgage REITs earn interest off these investments, which they then pay out to their unitholders. 

Like equity REITs, individuals can buy shares in these REITs via the stock exchange, just like would for any other stock. 

Of interesting note, mortgage REITs tend to perform better than equity REITs when interest rates are rising. However, changes in interest rates may also affect the probability that some borrowers will refinance or repay their mortgages – there’s two sides to every coin. 

Pros and Cons: What You Need to Know

Pros

  • No Property Management – We often consider real estate a passive form of investing. However if you buy a property and rent it out to a negligent tenant, it can be a huge time suck. REITs help you avoid being a property manager altogether.
  • Liquidity – Many REITs are traded on the public stock exchange. That means that unlike owning traditional real estate, you can sell your share with a quick phone call. 
  • Portfolio Diversification – REITs invest your money in multiple properties, in multiple different areas. This helps to diversify your portfolio and ensure that all your eggs aren’t in one basket.
  • Access to Commercial Properties – REITs open up investors to a whole host of properties that most real estate investors wouldn’t typically have access to. It’s not everyday that the average investor could go out and buy a multi-million dollar apartment complex.
  • Avoid Double Taxation – Unlike many investment vehicles, REITs pay out their distributions before they pay tax. This means that you avoid double taxation – helping you build wealth.

Cons

  • Lack of Control – Unlike when you buy a home and rent it out, as a unitholder you have no say in what properties you want to invest in or where they are located. While you don’t get to scope out the property first, you have to trust that the Trustees have done their due diligence – rest assured, they earned the name “TRUSTee” for a reason.
  • Property Specific Risks – As mentioned, REITs tend to specialize in a specific type of property, such as an office building REIT. It’s important to note that each type of property has risks associated with it and are susceptible to different economic conditions. This can be seen in the transition to work from home, in the case of office buildings. 
  • Investment Time – Like most real estate, REITs are best suited for longer term investments. It is recommended for investors looking to invest their money for 5+ years.
  • Slow Growth – In Canada, a REIT is required to distribute 90% of its profits to investors. Unlike penny stocks which don’t typically offer dividends and instead re-invest those earnings, REITs only have the remaining 10% of profits to grow the company by investing in additional properties. This means that you most likely won’t see your investment take off within a year or two.

How to Analyze REITs

Since REITs are dividend-paying stocks, they can be analyzed in a similar way that you would analyze other stocks, with a few minor differences. Before crunching the numbers, it’s important that you first look at the following factors:

  • The REITs’ Tenants – Are any of the tenants having major financial issues? This will likely affect their ability to repay their loan or pay their rent.
  • Acquisitions and Dispositions – Is the REIT growing their portfolio? Are they shrinking? Neither one of these is inherently good or bad, but it’s important to make note of and understand why they took those actions.

…now to crunching the numbers. Once a REIT looks like a solid investment opportunity, you need to make sure you’re paying a fair price for the stock.

Funds from Operations (FFO)

Following the General Accepted Accounting Principles (GAAP) , REITs must charge depreciation against their assets. However, as you likely know, many real estate properties generally appreciate in value over time, not depreciate. The depreciation expense can have a substantial impact on their reported net income and make a dividend payout ratio appear higher than it truly is. 

Additionally, we must account for the capital gains or losses from the sale of property. While these gains and losses are real, they’re not indicative of how much cash flow you can expect the REIT to generate in the future, so it’s important that we exclude these values to get a better understanding of the REITs performance. 

That’s where Funds From Operation (FFO) comes in. This quick calculation gives investors a clearer picture of the REITs true earnings. It is calculated using the following equation:

FFO = Net income + depreciation expense – gains on asset sales + losses on asset sales

Adjusted Funds from Operations (AFFO)

It’s important to note that each company calculates AFFO slightly differently. However, AFFO provides further adjustments to the REITs FFO to provides and even more accurate measure of the REITs performance. In the standard FFO calculation, we do not account for capital expenditures (CAPEX). Using AFFO, we deduct any capital expenditures to give a more accurate valuation. 

But utilizing these calculations, you’ll be able to get a better understanding of the REITs performance and if the REIT is undervalued or overvalued in comparison to other REITs.

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You Should Invest in Commercial Real Estate

A building is not valued on its brick and mortar but its cash flow. It is the subtlety in commercial real estate investing that “cash flow” and, ultimately, the net operating income of a property that is the hallmark of its value. Welcome to our investing in commercial real estate for beginners!

Key Points

  • The cornerstone of a commercial real estate investment is the cash that is generated by the commercial leases entered into by tenants with the landlord. 
  • Whether it be for office or retail space, it is the cash after expenses generated over the long term from commercial properties  that attracts the savvy investor. 
  • A building’s value is assessed by the size of its net operating income relative to other buildings in its geographic area.

So You’re Interested in Commercial Real Estate Investing? (Canada)

We’ve spoken before often about the need for diversification in one’s investment portfolio. Diversification attempts to mitigate investment risk by spreading one’s investment eggs in more than one basket. This helps grow your nest egg to help achieve your retirement goals. We’ve also spoken about how private market investment in real estate property can anchor anyone’s portfolio against the unpredictable headwinds of the public markets. We’ve often touted the benefits of private real estate investment, whether it be in residential properties, through private mortgages, REITs composed of commercial buildings, investment funds, etc.

The cornerstone of a commercial real estate investment is the cash that is generated by the commercial leases entered into by tenants with the landlord. Whether it be for office or retail space, it is the cash after expenses generated over the long term from commercial properties  that attracts the savvy investor. A building’s value is assessed by the size of its net operating income relative to other buildings in its geographic area.

Commercial real estate investing in Canada has many unique elements that investors should consider when readjusting their investment portfolios.

Different Ways of Investing in Commercial Real Estate (Canada)

Determining relative value is a function of what we refer to as the “cap rate.” The capitalization rate is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net income which the property is expected to generate and is calculated by dividing net operating income by property asset value. It’s expressed as a percentage, i.e., the cap rate. It is used to estimate the investor’s potential return on their investment in the real estate market.  Established markets will determine cap rates for various market segments in various geographic locations at various times. It is a very fluid relative score of value. By mathematical operation, the lower the cap rate, the higher in value will be the cash flow and, in turn, the value of the property.

This is how we explain why a small coffee shop in Toronto’s Kensington Market is worth more than a vacant four storey building in Timmins, Ontario. There are lots of coffee shops in downtown Toronto. There is a regular market for folks buying and selling coffee shops. How much people are willing to spend to obtain a desired cash flow (and potentially a monthly cash flow) will be reflected ultimately in the sale price of the property. Therefore, if we divide the net operating income of a particular coffee shop by the purchase price, we arrive at the “cap rate.” When we do that repeatedly over numerous transactions in a given area, we will derive an approximate cap rate for coffee shops!

The lower the cap rate, the higher in value will be the cash flow and, in turn, the value of the property.

Let’s presume the cap rate for a coffee shop in downtown Toronto is 6%. This is actually a low cap rate suggesting that the coffee shop business is pretty lucrative. The coffee shop we want to buy is in a dilapidated house on a postage stamp size piece of real estate in a crowded corner of the market. It has an annual gross income of $300,000, less expenses (including property taxes) of 40% leaving us an annual net income of $180,000 per year. If we take the net income and divide it by the cap rate, the value of the property is $3,000,000! We don’t care what the house is worth; it’s the cash flow!

Our vacant four storey commercial building with thousands of feet of commercial space in Timmins, Ontario, has no income. Though the brick and mortar of the four storey commercial building may represent a million dollars of construction material, if it is not generating income, it’s worth is only the land and the salvage costs of the building.

Therefore, good commercial real estate investment is all about cash flow. And there are a variety of ways of getting into good commercial real estate. Real estate investment trusts (REITs) are the favourite way most Canadians invest in commercial real estate. Actually buying office space and letting it out on a “triple net lease” basis (i.e., the tenant is responsible for ALL costs of  the space) is one way a few individuals of high net worth enter the property market.

Good commercial real estate investing is all about cash flow.

Learning How to Invest in Commercial Real Estate the Smart Way

  1. Solid return over the long haul: Investors in commercial real estate typically receive steady cash flow for their investments, with income generally distributed annually, quarterly or even monthly. That’s because high occupancies and predictable rents often provide the steady cash flow that most investors are looking for. In North America over the last 25 years, average return in private real estate investment has hovered around 10% (National Council of Real Estate Investment Fiduciaries (NCREIF))
  2. No correlated asset: Private real estate investments do not correlate with the public markets. Performance is not linked to publicly traded stocks or bonds.
  3. Commercial real estate is a tangible asset: You can visit it, walk through it, run your hand over the walls. It’s real, and you own it.
  4. Leverage: Commercial real estate can be leveraged. The acquisition, in part, can be financed with mortgage debt, or, if the equity in the property is available, can be leveraged for other investments.
  5. Tax advantages: There might be unique tax advantages acquiring commercial real estate. If one has purchased well-located properties, those properties should go up in value over time. Yet, for tax purposes, one can depreciate the value of the buildings over time, which helps to reduce yearly taxable income. The net effect is that the investor is depreciating for tax purposes what should turn out to be an appreciating asset for investment. Not many asset classes provide this benefit.
  6. Inflation hedge: Commercial property investment is a common inflation hedge. As inflation forces prices rise, so do commercial leases as property rents can be repeatedly adjusted to with inflation. All other things being equal, the return on stocks and bonds will actually diminish in an inflationary environment.

Commercial real estate investment is not the type of investment for all real estate investors. We encourage people who want to learn more to pick up commercial real estate investing books and discover what the pros know. Anything that delivers a solid predictable return, is a non-correlated asset, is tangible, and has possible tax advantages is definitely worth a glance.

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Fundscraper Property Trust – Mortgage Pool Growth Strategy

Join us for a one-hour interactive webinar, where our resident expert and Chief Compliance Officer, Gregory Colford, walks investors through each of the following opportunities and discusses the benefits of investing through the Fundscraper Property Trust.
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Fundscraper Property Trust – The Village at Thunderbird Webinar

During this Covid-19 period, Phoenix has become the number one growth market in the US for appreciated home prices. During this webinar, we learned from Sud Group, leaders in the multifamily investment space, why they see the Arizona market as the current and future growth story of our time.

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Earn Cash Flow & Build Wealth Through Real Estate with District REIT

Passive income real estate is known as one of the best ways to gain an additional source of revenue, attain security in retirement, and ultimately design a roadmap to achieving financial freedom.

However, passive income real estate investing is not necessarily the right fit for every investor. Would you like to take a more active role in real estate investing or a relatively passive role?

Learn all about passive income real estate, and see whether or not it sounds like a good fit for your investing personality type.

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The New Mortgage Syndication Rules For Non Qualified Syndicated Mortgages

The Ontario Securities Commission (OSC) and the Financial Services Regulatory Authority (FSRA) recently released proposed changes to the new rules for mortgages. If you’re an existing mortgage syndicator promoting non-qualified syndicated mortgage (NQSM) investments, you’ll either think it’s very good news or very bad news. We’ll walk you through the proposed changes.

Key Points

  • The regulators have divided the market by class of subscribers. If your class of subscribers generally meet the definition of a Permitted Client then you’re in luck! It will actually be easier for you to carry on your business than it was before the material changes made to the regulations in July 2018 when the Form 3 disclosure was introduced.
  • Fundscraper is able to show syndicators how they can continue profitably in business and give them the comfort that between them and the regulator stands a seasoned platform that will shield them and provide protection for their investors. 

How is the NQSM market changing?

Section 31.1 of Regulation 188/08 has been deleted in its entirety and with it the burdensome disclosure regime that brought to a halt the NQSM market. There are no longer prescribed deliveries or mandated disclosures to Permitted Clients not individuals. Initial disclosure requirements are minimal. In other words: Permitted Clients can be trusted to take care of themselves.

Under this new regime, FSRA has made every effort to facilitate and make efficient capital market investment in the NQSM by Canada’s biggest stakeholders.

Who qualifies as a permitted client?

There are 18 categories of Permitted Client. The obvious ones are charter banks, trust companies, dealers, and the like. The three most commonly used categories in the retail market are:

  1. An individual who beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 million
  2. A person or company that is entirely owned by an individual(s) referred to in the above paragraph, who holds the beneficial ownership interest in the person or company directly
  3. A person or company, other than an individual or an investment fund, that has net assets of at least $25 million as shown on its most recently prepared financial statements

What are the pros of the NQSM market change?

The regulators have divided the market by class of subscribers. If your class of subscribers generally meet the definition of a Permitted Client then you’re in luck! It will actually be easier for you to carry on your business than it was before the material changes made to the regulations in July 2018 when the Form 3 disclosure was introduced. Additionally, there will be no need for additional registrations with the OSC as contemplated in earlier drafts of the proposed legislation.

What is the private capital market?

If you are not dealing with Permitted Clients or you are dealing with a mix of Permitted Clients and persons who are not, then you fall into the exempt market, aka the private capital market. The OSC will oversee all of your activities in connection with your investors and will require that you provide the same standard of care as it mandates for all dealers. FSRA will continue to oversee all of your activities related to your dealing in mortgages. So, like a dumbbell, the OSC will be at one end of your deal and the FSRA will be at the other!

What are the cons of the NQSM market change?

A big blow for many syndicators is the loss of the $60,000 investment limit. Under this exemption, anyone was permitted to invest up to $60,000 in a NQSM within a 12 month period. To capture those smaller investors, syndicators will now likely have to fall back on the offering memorandum exemption (and its supplement for mortgage syndication) to continue servicing these smaller investors. Under the new guidelines, investment limits are smaller and are subject to eligibility.

The syndicator will also have to be registered with the OSC in some capacity — and will be subject to the same standards of practice as all other security dealers subject to OSC oversight. They’ll likely be required to take the exempt market exam to demonstrate proficiency in exempt market placement, and will have to learn a new investing vocabulary.

Additionally, the syndicator will also now be reporting to the OSC. It is anticipated this may be a major irritant (and cost) for syndicators, though the OSC suggests that syndicators should be treated the same as all other issuers in the exempt market.

For more potential pain points, we outlined more major aggravations the new OSC rules might cause syndicators.

How can I work around the new rules?

Fundscraper is a mortgage syndicator’s solution. We’re registered with FSCO as a mortgage brokerage and with the OSC as an Exempt Market Dealer in the Province of Ontario (as well as British Columbia, Alberta, Quebec, New Brunswick and Prince Edward Island). We have spent the last three and half years perfecting our online compliance procedures with the full expectation of the changes happening today in the mortgage syndication market. We discovered that by creating an interactive online environment we can greatly reduce the costs of compliance while delivering best-in-practice solutions. Once we qualify investors, we apply computer generated algorithms to their investment decisions to assess suitability of investment and flag syndicated mortgage risks.

If you’re not thrilled about the new OSC rules, we can help.

Fundscraper is able to show syndicators how they can continue profitably in business and give them the comfort that between them and the regulator stands a seasoned platform that will shield them and provide protection for their investors. Having Fundscraper as a trusted ally helps put the mortgage syndicator back in business with far less administrative headaches. Contact us to get started today.

Eliminate Compliance Issues

Ensure your compliance is current and up-to-date with the latest regulations. Our experts help companies ensure compliance, improve performance and more.

Real Estate and Retirement Webinar

Are you not sure how long your retirement funds in your nest egg will last?

Retirement is a daunting prospect for many of us because we don’t know what our senior living expenses will amount to.

The benefit of investing in real estate during your senior years is that it may provide additional income from your retirement portfolio. Certain kinds of investments in real estate do generate income which can enjoy certain tax benefits.

Fundscraper Property Trust is an investment vehicle that allows Canadians to make equity investments into pooled mortgages. With a target return of 6-11% across our various pools, we harness the stable nature of real estate while providing the type of built-in diversification you would receive from a mutual fund, creating what we hope is an overall safer and simplified way to invest in real estate.

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Mortgage Investment Corporations for Mortgage Brokers and Agents

Mortgage investment corporations (MICs) have been around since 1973. MICs are a terrific vehicle for bringing like-minded investors together to collectively invest in one of Canada’s hottest investment products: mortgages!

Purchasing a mortgage is too expensive for many investors and may overly concentrate their investment portfolio in one asset class. MICs, however, mitigate those risks and add diversification. By bringing together several investors under one roof, the MIC can invest in more than one mortgage, distributing the risk among the members. The MIC can also distribute returns to its investors without making any withholding.

Any broker or agent seeking to create a MIC should seek advice and direction of a qualified lawyer. We put together an overview of the issues to keep in mind as you seek to create a MIC and/or advise your client to invest in one.

Key Points

  • Purchasing a mortgage is too expensive for many investors and may overly concentrate their investment portfolio in one asset class. MICs, however, mitigate those risks and add diversification. 
  • The Tax Act also deems a mortgage investment corporation to be a public company. The benefit of being deemed a public corporation is that the shares of a public corporation are qualified investments for registered plans, including registered retirement savings plans, registered retirement income funds, and tax-free savings accounts.
  • Every prospective investor should receive a suitability assessment, regardless of who they are or how much capital they have to invest.

Promoter (n): the person who organizes the MIC and promotes it to investors.

 

How to establish a MIC

The first step is creating a corporation, which you or your lawyer can do online with an approved service provider. After the company is incorporated, you will have to “organize” it by appointing directors and officers, establishing a registered head office, and putting in place a by-law.

In order to be considered a MIC under the Tax Act, it must have the following attributes:

  1. It must be a Canadian company
  2. It can only invest the funds of the corporation in mortgages that are secured against real property situated in Canada
  3. It cannot manage or develop property
  4. There must be at least 20 shareholders, with no one shareholder owning more than 25% of the issued shares of any class of sharers of the corporation
  5. At least half of the property of the corporation must be in cash, deposits, and mortgages secured on houses or on property included within a housing project
  6. Debt is within the limits set out in the Income Tax Act

What makes a MIC special is the treatment it receives under the Tax Act.

The Tax Act also deems a mortgage investment corporation to be a public company. The benefit of being deemed a public corporation is that the shares of a public corporation are qualified investments for registered plans, including registered retirement savings plans, registered retirement income funds, and tax-free savings accounts.

If the MIC fails to qualify in any one aspect above, it risks losing its tax status as a MIC and its shares will no longer be considered qualified investments. It will have to impose withholding, and shareholders will not be happy.

MICs are not publicly traded companies, so they can only raise money in the private investment markets under rules that govern raising private capital.

Who can invest in a MIC?

In Ontario, there are very strict rules about soliciting people to invest in a venture, including MICs. Raising money in the private markets is much less expensive than in the public markets, as one does not need to prepare and file an offering document (i.e., a prospectus) with the Ontario Securities Commission (the OSC). The most common way that a company organizes and brings in early investors is via the private issuer exemption.

To use the private issuer exemption, the following elements must be in place:

  • There must be a provision in the articles of the corporation (or an agreement among shareholders) that a shareholder cannot trade their shares without consent of the board.
  • There cannot be more than 50 shareholders, not including employees of the corporation.
  • Those 50 shareholders must have a pre-existing relationship with the Corporation, including: an employee of the Corporation, an accredited investor, or a spouse, family member, close personal friend, or business associate of a founder.

Once the corporation passes the 50 shareholder threshold, the corporation is subject to various reporting obligations related to raising capital. It is necessary that the corporation seek appropriate legal advice at this stage.

A mortgage broker or agent cannot invite just anyone to invest in their MIC; investors may only be from a select group and not members of the general public.

What is an accredited investor?

Many promoters of MICs will only allow accredited investors to be investors. An accredited investor is an investor with pre-existing wealth and/or substantial income who has the financial freedom to invest in whatever they please. Because of their financial situation, regulatory authorities don’t think they need the same protections as other investors.

Important considerations for investing in MICs

The Private Issuer Exemption requires the issuer/promoter to assess whether the investment is suitable for the prospective investor regardless of who the investor might be. However, the most common deficiency cited by the OSC when auditing the use of the exemption is the absence of such a suitability assessment. Without it, it’s difficult to determine whether the investment is appropriate for the investor.

It’s not surprising that issues/promoters have been found guilty under securities law for not (i) adequately performing their due diligence obligations and (ii) retaining the services of a registered dealer when selling their security. To avoid conflict (and hefty fines), the issuer/promoter should retain the services of a registered independent securities dealer to facilitate subscriptions in the MIC.

Every prospective investor should receive a suitability assessment, regardless of who they are or how much capital they have to invest.

Lending and the Mortgages Act

In the Province of Ontario, everyone who wishes to be a lender must be registered under the Mortgages Act unless they are otherwise exempt or have employed the services of a registrant under the Mortgages Act to perform those services for them.

MICs are not required to be registered under the Mortgages Act. MICs generally take advantage of a provision under the regulation to the Mortgage Act that provides a person or entity is exempted from having to have a brokerage license if the person or entity carries on business as a mortgage lender solely through a mortgage brokerage or a person or entity that is exempt from the requirement to have a brokerage license.

Working with MICs can be very good for everyone involved: the broker, the investor, the lender, and the borrower. For the mortgage broker or agent, it is imperative that the rules be followed carefully.

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