“Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” Albert Einstein once said.
Nobody knows whether these are actually words from Einstein, but regardless, it’s a heck of a quote that sums up compound interest in a nutshell.
Unfortunately, too many of today’s Canadian investors don’t appear to have a firm understanding of the concept of compounding as demonstrated by their improper use of the TFSA.
You see, by using the TFSA as a savings vehicle with TFSA high interest savings accounts, you’re settling for an interest rate that’s at (or even less than) the rate of inflation and are forfeiting your ability to compound your money many times over, and completely free of taxation.
I have a feeling that if Canadians were adequately educated on the difficult-to-fathom wealth-creation potential of the TFSA, they’d think twice about buying that GIC, those unrewarding bond funds, or stashing cash in a savings account.
Yes, equities require one to manage risks, but there are alternative investments out there that don’t trade based on Trump tweets. One class of investments is real estate.
Through REITs, investors can expose themselves to a broad range of real estate sub-industries without requiring millions of dollars in starting capital.
Moreover, unlike investing in physical real estate, REIT investing doesn’t require one to invest in a single, undiversified asset on a massive margin with hefty commissions and a lack of liquidity — an insane thing to do as an investor.
Investors can adjust their real estate exposure and gain immediate access to some of the hottest real estate sub-industries that just wouldn’t be possible with physical property unless you’re a billionaire.
Through REITs, you could start a mini real estate empire, just like in the game of monopoly, with hotels, residential properties, hospitals, and everything in between.
Moreover, you can identify real estate sub-industries or geographies riding on secular tailwinds. Consider Canadian Apartment Properties REIT (TSX:CAR.UN), or CAPREIT for short.
The residential REIT is heavily exposed to the Vancouver and Toronto housing markets, both of which are in a rental state of emergency, with demand heavily outweighing supply.
CAPREIT stock has soared 133% over the last five years, and with new projects in attractive geographies underway, the REIT is likely to continue boosting its AFFO and in turn its distribution over time.
Moreover, it looks like the Vancouver and Toronto rental markets are showing no signs of cooling down, which bodes well for CAPREIT, which has been maximizing ROEs for investors.
CAPREIT doesn’t need to renovate or spruce up its worn units to command sky-high occupancy rates. Favourable market conditions allow the REIT to spend a majority of its cash flows on growth projects while returning the rest into the pockets of its shareholders.
For a front-row seat to some of the hottest real estate rental markets in the world, CAPREIT is a one-stop-shop that can give your TFSA a real boost with growing distributions and substantial capital gains.
Stay hungry. Stay Foolish.