When people hear alternative, they immediately think exotic and risky, says David Kaufman, president of Westcourt Capital Corp., a Toronto-based investment fund specializing in income-generating funds tied to real estate and equity investments not correlated to the ups and downs of the stock market.
Firms such as Westcourt allow high-net-worth clients invest in several revenue-stream options, including mortgage investment corporations that invest in residential mortgages, real estate investment trusts (REITs), and more unusual investments such as Canadian farmland.
Not all property investments. Chris Biasutti, a Vancouver-based exempt market representative who established his own business four years ago to advise clients on the various investment options available in the exempt market and their suitability says in the past several years he’s put money into everything from mortgage income corporations, single mortgages, private REITs, and raw land syndications.
Biasutti’s success investing in the alternative space has led him to teach investors about alternative real estate and provide research on alternative investment products. “The government, with its regulations, really lumps this whole marketplace into what they call high risk investment but the reality is that there is a whole spectrum of risk,” running from large, stable mortgage investment funds to speculative land syndication.
On the spectrum of risk, one of the safest and most steady investment harbours for high-net-worth investors is a mortgage investment fund, which manages pools of non-bank mortgage loans for pension funds, foundations, and wealthy individuals. Mark Hilson, managing general partner of mortgage fund giant Romspen, says the advantage of investing in mortgage funds over many other alternative investments is stability.
“You are one step up from the equity, so your risk is meaningfully reduced, and your returns are much more predictable.” Further, returns from an investment in such funds can either be sheltered from tax in an RRSP or held outside a registered plan.
Investing in mortgage funds, or REITs have another clear advantage over investing directly in real estate. They are liquid. In the case of public REITs, units can be sold just like shares. Likewise, most funds let investors easily sell at regular intervals, often monthly. Owning and selling hard real estate assets, like a strip mall, is a much longer-term proposition, typically taking six months, during which time property prices can fall dramatically.
There are several types of alternative real estate investing:
Direct Mortgage Lending – A single investor, or group of investors (syndicated), lend capital to a borrower under a mortgage agreement (the loan). The investment is secured against the borrower’s property through the registration of the mortgage agreement and names of the investors appear on the title. There is increased risk compared to Mortgage Income Funds as there is only one mortgage rather than a diversified portfolio of mortgages.
Land Banking: Individual – A single investor acquires a parcel of land, often on the outskirts of a growing municipality, and holds it until inflation and urban sprawl increases its value. Land banking is one of the least liquid forms of real estate investing and very few banks will finance raw land, so the leveraging advantage of real estate can be lost in this strategy.
Land Banking: Group/Undivided Interest – Investors who do not have the desire to purchase a parcel of land individually may choose to participate alongside a group of investors by buying an undivided interest in a parcel. None of the investors have direct control of the land, so their capital is committed until the entire group chooses to sell.
Limited Partnerships for Land/Building Development - Often used for projects involving the development of raw land, the construction of new buildings, and the ownership of real estate or other assets.
Mortgage Income Fund (MIF) - A managed pool of capital used to make multiple mortgage investments secured against real property. Interest income earned on the fund’s portfolio is distributed to shareholders through monthly, quarterly or annual dividends.
Real Estate Investment Trust (REIT): Private - A managed pool of capital used to purchase income producing real estate. Investors participate in private REITs by purchasing shares directly from the trust. Liquidity of private REIT shares are often dependant upon the REIT buying shares back from investors at set times throughout the year. On the plus side, share prices are not influenced by stock market volatility and do not carry the high operating overhead of public REITs.
REIT: Public – Shares are purchased through the public market and the REIT is required to file financial statements for publication. Investors purchase shares in public REITs because of the liquidity (they’re easy to exit), but they carry the risk of market volatility. Public REITs often trade at prices well above or well below the true value of the shares based on the combined value of the portfolio.
Paul Brent is a business journalist based in Toronto.
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