While mortgage investment corporations aren’t typically conservative lenders, 6ix Capital Group has gone against the grain in a bid to both protect investors and reap healthy yields.
Mortgage Investment Corporations, or MICs as they’re known, use investors’ monies to fund mortgages, going as high as 95% loan-to-value. The higher the LTV—and, therefore, the risk—the higher the yield. However, 6ix Capital Group is not one of those MICs.
“We’re conservative,” said 6ix’s Vice President of Business Development Scott Roberts. “We lend at a maximum of 75% loan-to-value and I’ve never seen another MIC with an LTV that low. Preserving capital is our number one priority. A house would have to drop 25% in value before there’s any risk of loss for the MIC, and that’s unlikely in the Toronto market.”
6ix’s formula is pretty simple: It strives for annual returns of 9.5% for investors by mitigating the risks associated with lending, and it also focuses on the Toronto region’s single-family detached housing market because there is arguably no safer form of housing anywhere in Canada.
“Every time we make a loan, we personally invest in that same loan, essentially co-lending,” said Roberts. “So we always ensure we make money too, but we also have a stake in every loan we’re making, and from an investor’s perspective, it’s reassuring that the person investing your money is also investing with you.
By law, only 50% of Canadian MICs’ portfolios must be invested in residential real estate, however, 6ix Capital is in a niche market and only lends in the residential sector. Additionally, it also does not lend on condos because they don’t benefit from the ownership of land, which is valuable in the Toronto market, and are less stable than single-family detached houses.
“It’s the one that has the least supply,” said Roberts, referring to single-family detached housing. “In the downtown core, there isn’t any land left to build single-family homes. Toronto can’t expand south because there’s a lake; can’t go north of Alliston because of the Oak Ridges Moraine; and the east and west are fully built. From that perspective, there’s a lot more demand than supply. Toronto has condos going up all over the place, and at some point there could be oversupply of condos, but there will never be oversupply of single-family homes.”
The other reason 6ix Capital Group only lends in Toronto is because of the city’s diverse economy. Juxtaposing Canada’s largest city with Calgary, the latter is too reliant on the oil and gas sector, whereas no single industry dominates Toronto.
“Having a diverse economy stabilizes the housing market, and that ensures prices don’t spike or drop too rapidly.”
In keeping with its theme of risk mitigation, 6ix Capital only lends for durations of 12 months or less because borrowers’ circumstances are less likely to change in such a short period of time. As Roberts tell it, short-term investments insulate investors.
“The market could change dramatically or the homeowner’s finances could change,” he said. ‘If you make a five-year loan, a lot of things can happen during that time. So every 12 months, we can call back the loan.”
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