The condo market is slumping, and Iâm baffled that more investors arenât considering the far easier alternative. Instead of taking on a mortgage, condo fees, property taxes, repairs, and the joy of managing tenants, you can own an apartment real estate investment trust (REIT) in a Tax-Free Savings Account (TFSA).
You avoid taxes on growth and income, you skip the headaches of being a landlord, and you still collect monthly cash flow. One option that stands out right now is Canadian Apartment Properties REIT (TSX: CAR.UN), better known as CAPREIT. Here’s what you need to know about it before investing.
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How to understand CAPREIT
CAPREIT is one of the largest residential landlords in the country, with a portfolio of apartment units across Canadaâs major cities and select European holdings. Residential real estate tends to be more stable than commercial real estate because people always need somewhere to live, and that shows up in CAPREITâs numbers.
The trust continues to report strong occupancy, sitting at 97.6%. This helps support steady growth in funds from operations (FFO), which is the REIT version of earnings. CAPREITâs FFO per unit reached $2.54 over the last 12 months, a 2.4% annualized growth rate despite higher interest rates and rising operating costs. Residential rents have also been rising steadily, giving CAPREIT a built-in inflation hedge that many other REITs lack.
Financially, CAPREIT remains in solid shape. The trust carries a healthy balance sheet relative to its peers with lower debt-to-equity ratios, and because residential leases are shorter in duration, CAPREIT can reprice rents more frequently. This flexibility is valuable when inflation is high or when interest rates shift.
CAPREITâs monthly distribution
CAPREIT pays a monthly distribution of $0.1292 per unit. Based on the current unit price, the yield sits around 4.05%. This is above its long-term historical average, and that usually signals undervaluation. FFO has grown, but the unit price has lagged, creating a more attractive entry point for income-focused investors.
Importantly, the payout ratio is about 61% of recent FFO. For a residential REIT, that is very safe. CAPREIT has also raised its distribution at an annualized rate of 5.4% over the past five years, which means your income grows over time instead of staying flat.
Since distributions are mostly taxed as ordinary income with some return of capital, the best home for CAPREIT is a TFSA. Inside a TFSA, you keep every dollar of monthly cash flow. You can reinvest for compounding or withdraw it without any tax consequences.
