Types of Real Estate
Mortgage Income Fund (MIF)
A Mortgage Income Fund (MIF) is a managed pool of capital that is 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. IWG's Canadian Mortgage Income Fund (CMIF) also benefits from unique tax treatment that allows its earnings to be distributed to shareholders without paying corporate tax.
Click here to learn more about IWG's Canadian Mortgage Income Fund (CMIF).
Direct Mortgage Lending
Direct Mortgage Lending involves a single investor or group of investors (syndicated) that 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 the investor(s) name(s) appear on the title.
The risk associated with this type of lending could be considered slightly greater as there is only one mortgage rather than a diversified portfolio of mortgages. If the mortgage was to go into default, the investor(s) would lose their income stream and would have to fund and manage the legal process of recovering the investment through foreclosure.
To learn more about Direct Mortgage Lending, please contact an IWG representative by clicking here.
Land Banking (Individual)
Land banking describes the process where a single investor acquires a parcel of land, often on the outskirts of a growing municipality, and holds it until inflation and urban sprawl (ripple effect) increases its value. A land banker's exit strategy is often to wait until the land has appreciated sufficiently in value and then place it on the market for sale to a third party. 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. (Warning: raw land has very little income generating potential. Investors considering land banking should avoid any sort of leverage, and should purchase raw land using 100% cash.)
To learn more about Land Banking, please contact an IWG Representative by clicking here.
Land Banking (Group/Undivided Interest)
Investors who do not have the financial means to purchase a parcel of land individually may choose to participate alongside a group of investors by purchasing an ''undivided interest'' (UDI for short) in a parcel of land. Investors purchasing UDI's must remember that they are not purchasing a piece of the land parcel, but rather a share in the whole parcel.
Because an UDI investor has no direct control of the land, their capital is committed to the venture until the entire group chooses to sell. Investors looking at UDI investment opportunities must do their homework and inquire about the original price the group selling the UDI's paid for the land. Some UDI groups mark up the land by as much as 600% and pay massive commissions to their sales staff, before selling shares to investors.
Private REIT
A Private Real Estate Investment Trust (REIT) is a managed pool of capital that is used to purchase income producing real estate assets. Investors participate in Private REITs by purchasing shares directly from the REIT. Through their shares, an investor is entitled to a portion of the income and growth (increase in value) of the REIT's assets. In a private REIT, the share price is set based on the value of the total portfolio divided by the number of outstanding shares.
Because private REITs are not listed on public stock exchanges, the liquidity of private REIT shares is often dependant upon the REIT purchasing shares back from investors at set times throughout the year. Although this lack of liquidity may prevent some investors from investing in private REITs, many investors choose to use this private vehicle because the share price is not influenced by stock market volatility and does not carry the high operating overhead that Public REITs are subject to.
(Warning: investors looking to invest in Private REITs should do their homework! Look at the track record of the management team and request references from other investors. Investors should also inquire about the liquidity options so that they are familiar with an exit stragety before entering the investment.)
To learn more about Private REITs, please contact an IWG Representative by clicking here.
Public REIT
A public REIT functions in much the same manner as a private REIT, but the 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 and ease of exit, however, investors seeking investments in publicly traded REITs must also realize that the benefit of liquidity is also the greatest risk, as it is fully exposed to market volatility. It is not uncommon for shares in public REITs to trade at prices well above or well below the true value of the share based on the combined value of the portfolio.
To learn more about Public REITs, please contact an IWG Representative by clicking here.
Limited Partnerships for Land/Building Development
Limited Partnerships (LPs) are frequently used for projects involving the development of raw land, the construction of new buildings, and the ownership of real estate or other assets. While it is called a Limited Partnership, a more descriptive term would be a ''limited liability partnership''. In an LP, an investor can become a ''limited partner'' in a project, which limits their liability (risk) to only the capital that they are investing. As many ventures require the use of third party debt such as mortgages, construction loans, or other financing, the limited partner does not have to personally guarantee those debts and would not be liable should the partnership fail to meet its goals.
Another benefit to LPs is that the non-recoverable expenses of the project (''losses'' in accounting terms) such as labour and professional fees are divided amongst the partners so that they can apply them against their other income, reducing their personal taxes, (as long as the investment was made personally).
Once the Limited Partnership becomes profitable, all income earned by the partnership is divided among the partners. Because there is no ''corporate entity'' that is being taxed, each investor is required to pay tax at their own personal rate.
Investors interested in becoming limited partners in an LP should carefully research the experience and track record of the General Partner (the group putting the deal together). As many successful investors would attest, success follows success. Investors should make sure that they are partnering with a management team that is experienced in the field for which the partnership is being formed. For example, it may not be wise to invest in an LP where the goal is to develop a piece of real estate if the management team has no previous development experience.
Limited Partnerships can offer savvy investors an excellent opportunity for reward, but can also come with a high degree of risk. Be careful of LPs where a large amount of debt is being proposed for use in the project. Leverage (the use of debt to increase return on capital) is a double edged sword, it can drastically increase returns, but can just as quickly destroy a good project if too much is taken on.
To learn more about Limited Partnerships, please contact an IWG Representative by clicking here.
