Types of Private Market Investments

REITs or Real Estate Investment Trusts

Real Estate Investment Trusts own a pool of revenue properties. They look to increase the value of the properties and pay out the rental revenue to investors. Most REITs are publicly traded, but you can also invest in private REITs.

Private REITs are usually priced on a monthly or quarterly basis based on the value of the real estate they hold. This gives them the potential for greater stability compared to publicly traded REITs.  REITs are a popular investment for many because of the tax efficient monthly distributions. Often, most of their distribution treated as return of capital, which is beneficial from a tax perspective compared to interest income. As an investor you can choose to collect the monthly distributions if you want the income or have it reinvested back in the fund.

REITs use different strategies and may focus on different types of real estate like industrial, commercial, residential apartments, Canadian or US real estate. Most will look to acquire assets that they can make improvements to. This allows them to potentially increase rents and the value of the buildings over time.

REITs are eligible for registered accounts like RRSP, RRIF, RESP & TFSA, but because of their tax efficiency they work well with cash investments as well.  We have a couple REIT investment offerings through our dealer, Rethink and Diversify Securities Inc.

MIC’s or Mortgage Investment Corporations

There are hundreds of MICs all across Canada. They are not new, but are starting to get more interest from the average Canadian investor. They hold mortgages on real estate, have the ability to generate monthly cash flow and are not subject to the volatility of the public stock market

A MIC, or mortgage investment corporation, is a pool of mortgages. The MIC collects funds from investors and lends the money out in the form of mortgages. It then collects the interest on the mortgages and pays it out to investors. As a MIC investor you are a partial owner in all the mortgages, which gives you much greater diversification than only being able to lend the money out on one.

To qualify as a MIC at least half of the mortgages must be residential, but can also have some commercial and industrial mortgages, development or construction loans as well as bridge or interim financing. MICs will use reputable appraisal companies to determine the value of each property they are securing the mortgage against and will lend out a percentage of that value. They want to make sure they know the property’s fair market value, because they need to have an accurate assessment on their collateral in the event of borrower default.

MICs can have different strategies, like only lending in certain cities that they know well or have a maximum loan to value (LTV) percentage. Some MICs may only do first mortgages, which are usually considered safer than second and third mortgages, depending on loan to value ratios.

A MIC will charge a much higher rate of interest than a bank, because the mortgages are usually considered to be higher risk than bank mortgages. We like to see a MIC have a lower loan to value (LTV) and almost exclusively first mortgages

MICs are eligible for registered accounts like RRSP, RRIF, RESP & TFSA. These accounts shelter the tax that would normally have to be paid if the investment was purchased with cash or held in an open account.

Real Estate Development Projects

Development investments typical have a higher risk and higher reward potential than other types of private investments. Development projects have many moving parts, which means there are more places to run into problems and delays.  The goal of a development project is to build or create value and then sell the project once completed, so they have a growth focus and typically do not pay any income.  If everything goes according to plan development projects can generate high returns, but make sure you speak with an experience advisor that understands how the structure, management fees, debt/leverage, lease up and exit strategy work to help minimize the risk as much as possible.

Private Debt

Private debt can come in many different forms, but it simple terms it is lending money and collecting an interest rate in return for the loan.  The loans could be to businesses or individuals and have varying levels of security.  They typical focus on a part of the market that isn’t serviced by the big bank, so the interest rates are higher which potentially creates higher returns for investors.

As with any private investment, having an experienced advisor is extremely important.  There are many different nuances to be aware of when selecting the right opportunities.  The Advantage of working with us, is that we have the experience to identify the right opportunities for our clients.

Commodities

In the private markets there have been many different investment opportunities into the oil and gas sector, but tax beneficial investments in junior mining companies is the one of most interest to higher income earners.  These investments are called Flow-Through Shares.

Flow-through share offerings invest in junior mining companies that receive government tax credits that they can pass along or flow through to investors.  Through the Canadian Exploration Expense (CEE), federal and provincial tax credits flow through shares can generate a tax deduction in excess of 100%, even higher than contributing to a RRSP. 

Flow through shares have been around for well over 50 years, so this isn’t a new concept.  The underlying stocks are speculative so you will want to speak with an advisor that really understands your personal financial situation.  Then they can recommend the flow through offering is right for you.  As Canadians paying taxes is one of our largest expenses, so if you’re earning over $100,000 a year it’s definitely worth taking a closer look at what flow through can do for you.