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Discussion Starter #1 (Edited)
We are a family of three who will arrive in Toronto as landed immigrants this summer. I and my wife are 55 and 53 respectively, while our son is 17. He will go to college in 2 years’ time.

We have already set aside an adequate fund to buy a town house or a condo without the need of a mortgage. Our next plan is how to fund our daily expenditures. We both are professionals and hope to find jobs once we have settled down in Toronto. We plan to live within a budget of an average Canadian family income of $50,000 per year so that we will be able to live comfortably.

Assuming the worst case scenario of both of us being jobless for the next ten years, we have thus set aside $500,000 which will be able to sustain us for the next decade. This sum is on top of our house purchase money.

We would like to seek the forumer’s view of our investment plan to preserve our $500,000 in the next ten years.

We plan to invest in Mortgage Investment Corporations (MIC) which give annual returns of 8% to 10% currently. Using the rule of 72, a 8% annual return sustaining for 9 years will be able to double our $500,000. In other words, we will be able to live off the income of our MIC investments for the next 9 years and yet our original sum of $500,000 will still be preserved at the end of the decade. We know that 8% on $500,000 will only give us a $40,000 annual income. But this is OK to us as this plan is a worst case scenario where we will be out of job for 10 years.

To reduce the risks of investing in MICs, we plan to do the following
(1) invest $100,000 each on 5 MICs.
(2) spread the risk geographically e.g. 5 MICs lending on properties in 5 different provinces.
(3) choose MICs with 10-15 years records of good returns.
(4) choose MIC with conservative lending policies e.g. low loan-to-value ratio & majority loans granted are 1st mortgages

Will the above plan be workable? Is there any pit-falls in our assumptions? Other comments are welcome.

Thank you!:)
 

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I've never heard of a MIC before, but I just did some reading from WIKI. It sounds a Real Estate Investment Trust (REIT) that's not traded on the stock exchange. I could be wrong?

On a WIKI search, it says that, according to the Income tax Act:

8. Dividends received with respect to directly held shares, not held within RRSPs or RRIFs, are taxed as interest income in the shareholder’s hands. Dividends may be received in the form of cash, or additional shares.

This means the income is heavily taxed. Not very good, the tax man will take a good portion of the money. (I'm guessing maybe about 10K, google a tax calculator for exact)

I just copied this from WIKI:
Fraud - less likely since a MIC must produce audited financial statements every year. Check out the financial statements and see if the MIC is subject to any lawsuits.

Losing MIC Status - failing to keep within the Income Tax Act rules would cause the MIC to have its income taxed before being distributed to shareholders and would lower returns considerably

Manager (In)competence - the success of the MIC depends to a critical degree on the experience, expertise, judgement and good faith of the managers. Do they know the business, do they know their market and do they have a record of success? Can and will they find a steady flow of new mortgages to keep the income flowing in? Think of it as a job interview.

Leveraging - the rules allow the MIC to borrow money but some do more than others. The spread between the lower rate of the MIC's borrowing and the lending will boost the ability to generate shareholder returns but it also increases risk. The audited financial statements will show how much the MIC has borrowed. The prospectus will say if the MIC has a policy to cap what it will borrow. Many of the MICs are fairly short term lenders - 24 months or so - which reduces interest rate risk and should allow the MIC to continually readjust its lending rate to match increases or decreases in general interest rates and keep the spread between its lending and its bank borrowing rates constant.

Default on Mortgages - mortgage borrowers may not pay back what they owe; all the MICs claim to be very careful about who they lend to but some are explicitly in a niche where the banks don't tread or in second mortgages. The MIC gets a higher interest rate but that is associated with the higher risk. At least one MIC - Cooper Pacific - has two funds, one that lends out first mortgages with an 8% return and another with second mortgages with a 12% return. "You takes your picks and you takes your chances."

Market Downturn / Geographical concentration - some MICs, the smaller ones, are concentrated in very limited markets, like Westboro in Ottawa or Edgeworth in northern Alberta. Ottawa is a stable market but what happens to Edgeworth if the oil industry cools off considerably, as it has done in the past? A general economic recession would everywhere increase the number of borrowers having difficulty to repay.

Liquidity (Can't sell) - the basic method to get your money back is not a sale in some market since MICs are not (with one exception, I found) publicly quoted companies but for the MIC to redeem the shares; the restrictions vary by MIC, whether funds can be sold / withdrawn immediately, or with 30/60/90 days notice; for smaller MICs, the Income Tax Act restriction that each MIC must have at least 20 shareholders might come into play.
 

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Free advice and worth every penny!

I'll be blunt: I think your idea is awful.

First, the most important consideration for you is risk of capital loss (or its converse, safety of pricipal). That $500,000 is, presumably, the remainder of your lives' savings after purchasing a home. That money has to be safe! Mortgage insurance companies are generally small and leveraged. Mortgage rates are low, which means that profits from a portfolio of mortgages are relatively low. Also, simply buying a number of MICs does not insulate you from risk. Diversification protects from company-specific risk but not systemic risk. What's the systemic risk here? As mortgage rates rise, more mortgagors will be unable to meet their payments. Default rates may not spike dramatically, but they don't have to for a drop in profits (and thus payouts). The Bank of Canada has already stated its intention to raise interest rates. Also, many consider parts of Canada to be in a housing bubble.

Second, as jungle pointed out, payouts are taxed as interest. You obviously haven't taken that fact into account in your "rule of 72" calculations. REITs (real estate investment trusts) are companies (usually larger than MICs) that also offer 8-10% payouts. However, the payouts are more tax-advantaged (partly return of capital). Also, REITs, though they invest in real estate, can be better diversified than MICs, which invest mainly in residential mortgages. REITs invest in hotels, shopping centres, industrial parks, as well as residential real estate.

My suggestions? (Again worth every penny :)). Use all the tax-advantaged savings possible. Open a TFSA for yourself and your spouse. Unfortunately, you can shelter only $5,000 per person per year. For money outside tax-shelters such as TFSA/ RRSP, you want high safety with the payouts tax-advantaged, if possible. You may want to consider products from Claymore investments (an ETF provider). CAB (Claymore Advantaged Bond) is an ETF that replicates a broad index of Canadian bonds, all A or higher, ~ 40% corporate. The structure of the ETF allows payouts to be charaterized as return of capital or capital gains - very tax-efficient. The MER is 0.3% - very reasonable. CPD is an ETF of Canadian preferred shares; it offers limited growth but tax-advantaged income (dividends) at a reasonable MER, 0.45%. If you want to diversify out of Canada, then consider CYH (Claymore global advantaged), an ETF of foreign dividend paying corporations, REITs, and master limited partnerships. The structure of the ETF allows payouts to be characterized as return of capital or capital gains. The MER is higher, but still reasonable at 0.65%. The risk of CYH is higher, but the potential growth is higher too.

You haven't mentioned what field you work in. Obviously, the best option for your financial well-being is to work in your field. Have you considered moving to the area that needs your skills most? Drawing a good income for the next 10 years would eliminate most of your financial worries.
 

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Simply put, it's too many eggs in one basket, to hold capital for 10 years, especially when the Canadian housing market is due for a correction? Who knows what will happen to the value of those MICs, if people default or fall under water with their home values.
 

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I agree with the above points, too many eggs in one basket, they are too heavily taxed, and they can be illiquid.

The tax burden on this will take its toll on your calculations.

If you really wanted to put all of your money into a Real Estate type investment, and you really needed 10% return. REITs are a more tax efficient way to do that. However that offers you no diversification in the event of a RE sector downturn.

Definitely use the TFSA/RRSP accounts to shelter tax dollars. however as a new citizen you wouldn't have RRSP contribution room as of yet.

This link may be helpful:

http://www.dailymarkets.com/economy/2010/05/03/a-primer-on-investing-in-mortgage-investment-corporations-mics-in-canada/

Welcome to Canada!
 

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Read Garth Turner

Garth Turner at greaterfool.ca has convincing arguments that Canadian real estate may fall for the next ten years.

I would lean toward a diversified portfolio of equities, preferred shares, bonds, and cash to preserve capital and achieve higher returns with income as well.

One way of preserving capital in the stock market is market timing. Here is a study that uses SMA200 to reduce downside risk: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461
 

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We plan to invest in Mortgage Investment Corporations (MIC) which give annual returns of 8% to 10% currently.

We are in a prolonged period of historically low interest rates. There are no investments that can offer you that kind of return and still have security of capital. So if you need security of capital you will have to settle for 4-5% in Guaranteed Investment Certificates or something similar.

If you can accept the risk of equity investments, then there are many Balanced funds; CDN equity Funds; and CDN Dividend funds that would be relatively low risk over a 10-year horizon. But I don't think you can count on any of them to deliver 10%. Investing 100% in real estate would be rather risky, even in the CDN market.
 

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We are a family of three who will arrive in Toronto as landed immigrants this summer.
First, congratulations on choosing to come to Canada, and best wishes for you and your family as you resettle here.

On to your question ...

We plan to invest in Mortgage Investment Corporations (MIC) which give annual returns of 8% to 10% currently.

<snip>

To reduce the risks of investing in MICs, we plan to do the following
(1) invest $100,000 each on 5 MICs.
(2) spread the risk geographically e.g. 5 MICs lending on properties in 5 different provinces.
(3) choose MICs with 10-15 years records of good returns.
(4) choose MIC with conservative lending policies e.g. low loan-to-value ratio & majority loans granted are 1st mortgages
I will echo what other posters have said. Your proposed plan is heavily concentrated in one asset class -- you could be financially ruined if this sector tanks.

Furthermore, 8% to 10% historical returns are almost too good to be true; without knowing anything about MICs, it makes me very suspicious about just how risky these assets really are. (To put into perspective, some junk bonds trade in this range...)

My general feeling is that you should, instead, build (not necessarily by allocating all of the money at once) a diversified portfolio of dividend-paying equities, investment-grade bonds, and fixed-income investments which will help to minimize the risk that any given sector will hurt your portfolio.
 

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Wikipedia covers what these MICs are: http://en.wikipedia.org/wiki/Mortgage_Investment_Corporation

It seems that there are some serious risks to consider.

  • Fraud - less likely since a MIC must produce audited financial statements every year. Check out the financial statements and see if the MIC is subject to any lawsuits.
  • Losing MIC Status - failing to keep within the Income Tax Act rules would cause the MIC to have its income taxed before being distributed to shareholders and would lower returns considerably
  • Manager (In)competence - the success of the MIC depends to a critical degree on the experience, expertise, judgement and good faith of the managers. Do they know the business, do they know their market and do they have a record of success? Can and will they find a steady flow of new mortgages to keep the income flowing in? Think of it as a job interview.
  • Leveraging - the rules allow the MIC to borrow money but some do more than others. The spread between the lower rate of the MIC's borrowing and the lending will boost the ability to generate shareholder returns but it also increases risk. The audited financial statements will show how much the MIC has borrowed. The prospectus will say if the MIC has a policy to cap what it will borrow. Many of the MICs are fairly short term lenders - 24 months or so - which reduces interest rate risk and should allow the MIC to continually readjust its lending rate to match increases or decreases in general interest rates and keep the spread between its lending and its bank borrowing rates constant.
  • Default on Mortgages - mortgage borrowers may not pay back what they owe; all the MICs claim to be very careful about who they lend to but some are explicitly in a niche where the banks don't tread or in second mortgages. The MIC gets a higher interest rate but that is associated with the higher risk. At least one MIC - Cooper Pacific - has two funds, one that lends out first mortgages with an 8% return and another with second mortgages with a 12% return. "You takes your picks and you takes your chances."
  • Market Downturn / Geographical concentration - some MICs, the smaller ones, are concentrated in very limited markets, like Westboro in Ottawa or Edgeworth in northern Alberta. Ottawa is a stable market but what happens to Edgeworth if the oil industry cools off considerably, as it has done in the past? A general economic recession would everywhere increase the number of borrowers having difficulty to repay.
  • Liquidity (Can't sell) - the basic method to get your money back is not a sale in some market since MICs are not (with one exception, I found) publicly quoted companies but for the MIC to redeem the shares; the restrictions vary by MIC, whether funds can be sold / withdrawn immediately, or with 30/60/90 days notice; for smaller MICs, the Income Tax Act restriction that each MIC must have at least 20 shareholders might come into play.
Of these, I suspect that the risk of default is perhaps the scariest. A reliance on the manager's competency also scares me. (Generally, I view most "managers of my money" as being rather incompetent, which is why I prefer to invest everything myself.)
 

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This is the second time on this forum (I think) that I've seen the "rule of 72" invoked to support an investing strategy.

This rule is a mathematical formula which helps you you estimate the number of periods required to double an original investment. It is not in any way a predictor of investment performance.

Yes, if your investment returns 8% per year, then it will double after 9 years.

But what if it doesn't return 8% per year? You have characterized this scenario as the "worst case" scenario - but it seems to hinge on an unrealistic return assumption.
 

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And you need a return of 8% after taxes to make the rule of 72 work in the previously stated example to have it double every 9 years.
 

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Garth Turner at greaterfool.ca has convincing arguments that Canadian real estate may fall for the next ten years.
Purely IMHO, I would caution against using anything written or said by Garth Turner to make investment or asset allocation decisions.
One day he's warning against bonds, next day it's preferred shares, then the housing market.
He's right every now and then of course, but so will you and I be if we were to randomly pick things.
His party-hopping has taken away any personal credibility in my eyes as well.
 

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Harold, Mike: After studying economic bubbles, I think Garth Turner is right about some Canadian real estate markets are in a bubble. Of course, neo-classical economics say there are no economic bubbles, but as a student of history, I have to conclude otherwise.

Turner made a call in March 2009 to go all in and made a call in December 2009 to sell. I guess a broken clock is right twice a day.

Turner isn't all knowing, but some of his arguments are sound.
 

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I'll echo what other posters have said: MICs may be a very risky place if $500K is your entire capital. If you are heading to Ontario, it is likely that you may not even be able to purchase MICs, which are sold to accredited investors.

As with any investment, you should pay attention to the downside. What if you lose a portion or all your capital invested in MICs? Would you be able to manage okay what with starting a new life in this country and all? The answer will help you determine whether MICs are suitable for you.
 

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drdtyc, methinks you have been listening to a sales pitch by a MIC agent and quite likely an MLM type scheme.
If you want to take a bite of the individual residential mortgage payments, a safe[r] alternative may be a mortgage income mutual fund.
Most of the large banks have an in-house mortgage income fund.
They are usually no load funds and you can purchase them from your local bank branch.
Following is one such from Scotiabank:
http://www.scotiabank.com/funds/profiles/FP6661_74_ENG.pdf

The fund summary states:

The fund's objective is to provide regular interest income. It invests primarily in high quality mortgages on residential properties in Canada. These mortgages are
i) insured or guaranteed by Canadian federal or provincial governments, or their agencies, or
ii) conventional first mortgages with loan-to-value ratios of no more than
75%, unless the excess is insured by an insurance company registered or licensed under federal or provincial legislation.


The returns are nowhere close to your target 8% (which is probably what the sales dude promised you).
As always, read prospectus before investing and due your due diligence, etc.

And yes, I wouldn't dream of investing anywhere close to $500K into such an instrument.
 

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dr d, many here have wise counsel for you, which is fortunate because we all hope your savings will serve to launch a happy and prosperous new life here in canada while also providing a comfortable emergency fall-back fund. In particular harold, larry & dr V have sensible things to say.

larry says:

" ... I'll be blunt: I think your idea [to invest the half-million in MICs] is awful."

yes, larry is right, and harold backs him up.

and dr V counsels wisely:

" ... my general feeling is that you should, instead, build (not necessarily by allocating all of the money at once) a diversified portfolio of dividend-paying equities, investment-grade bonds, and fixed-income investments which will help to minimize the risk that any given sector will hurt your portfolio."

fortunately for our future concitoyens, markets are tumbling. Nothing will be lost if new studies are made and new insights are sought. Even after arrival, funds can be left temporarily in high-interest savings accounts while time & attention get devoted to new advisors and new approaches, hopefully along dr V's lines.

with one important exception, i believe everyone would concur that larry's suggestion for setting up 2 tax-free savings accounts, one for each spouse, each in the amount of $5,000, should be implemented right off the bat.

the exception is too important to neglect. I believe there is a provision for new immigrants with substantial assets to escape income tax on those assets for approximately 2 years after arrival in canada. Generally, such immigrants leave such assets in foreign tax enclaves such as the bahamas or hong kong, although the assets are not hidden from the canadian tax authorities and everything is legitimate. Also speaking generally, it's my impression that many canadian financial houses maintain active businesses in bahamas, channel islands, hong kong etc. catering to such immigrants.

so sorry, but i don't have firsthand knowledge of this (my ancestors, you see, were the kind that arrived penniless in the holds of boats.) Moreover, i don't know if a half-million would be considered substantial enough assets. Wherever you are, HSBC would be a knowledgeable bank at which to begin inquiries. The canadian immigration officials at whatever embassy you are dealing with should also have some knowledge of this program, which was designed to attract wealthy investors. It is worth checking out to see if you qualify.

and even if you would qualify, and would indeed choose to take this route, i for one believe that a domestic TFSA in the amount of 5,000 for each spouse set up soon after arrival in canada cannot be improved upon.
 

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I have a different kind of advice as usual.

First of all when you are a new immigrant to Canada be very careful.

The first thing I would do is rent a place for a year. I have a couple good reasons for this. The first one is because before you buy a house you need to learn about the different areas. The second is because you have no idea where you will work.

The second thing to be very aware of is that as soon as you get here people will be trying to separate you from your money with all kinds of hare brained investments.

MOST OF THESE PEOPLE WILL BE FROM YOUR OWN CULTURAL GROUP. Lots and lots of people prey on the vulnerable new immigrant who is in a rush to get settled.

It is very comfortable to move to Canada and immediately be accepted as a new immigrant among your own people and culture. My advice is not to get comfortable with people of your own culture but to get out and away and learn how things work here. This will make you less vulnerable.

I have seen many examples of this kind of behavior. When I first moved to Toronto I was only one of three Canadian people that lived in a building of Polish immigrants. The people who were the supers in the building were police officers in their home country and they ran that place with an iron grip. Every polish person was terrified of them. Most had settled in and were working for polish companies and going home to their polish run building. Some of them after years of being in Canada did not even speak English. It was almost as if they were trapped by the same kind of world they had immigrated to escape. They did get all the parking spots though :)

Then later on in property management I met a guy who got people's money and bought properties and "managed them" One house he bought he didn't pay the heat and the pipes broke and the entire basement flooded and grew the worst mold I had ever seen. All his properties were managed in the same way and they were basically unrentable. He has the distinction of being one of the most dishonest people I have ever met in my life. God help you if you invested with him. In person he looked great and was as smooth as silk.

So I say take your time, rent a while, put your money in separate banks so that it is all FDIC insured. Learn everything you can and be very vigilant. Do your due diligence. Don't buy a Dollarstore or convenience store or any business. Be very careful.
 

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Discussion Starter #20 (Edited)
Dear everyone who has commented on the MIC plan I contemplated,

I am most grateful to read about your advices as well as welcoming me to Canada.

With the benefit of hindsight, I now realize that I was "only seeing the trees but not the forest" when I talked about diversifying into 5 MICs but was not aware that my investment remains concentrated in one single asset type i.e. loans on real estate.

From your advices, we plan to do the following:
(1) put $5000 into TFSA each for my wife and myself
(2) rent a place to stay for the first year without committing to buy our home and be tied down to one location.
(3) widen our social circle to mingle with people from various cultural backgrounds other than our own.
(4) take time to work out a plan to diversify our investment into various asset classes with an aim to preserve our saving.
(5) Consider dividend stocks, ETF and REITs etc
(6) Explore with a bank e.g. HSBC to see if our asset size is qualified for more lenient tax treatment within our first two years of landing in Canada
(7) Look for jobs to accumulate more savings before retirement age.

Without thinking through the various investment options in details, I have three pressing questions to ask:
(1) Which vehicles are best for temporarily parking our housing and investment funds besides the $10,000 put into two TFSA?

(2) Would this summer be a good time to buy into bond ETFs? In fact, I personally prefer to hold other fixed income assets instead of bonds. But it seems most people are talking about 50/50 or 60/40 bond/stock mix as a common asset allocation strategy.

(3) With retirement in the 10 year horizon, would a couch potato strategy of index investment be appropriate? My worry is the market will be down when I retire. How about dividend growth strategy? If I buy into dividend growing stocks, hopefully I will have a sizable dividend income ten year down the road even the market is down at that time.

Please bounce me with more ideas.
Thanks again.
 
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