Wondering whether to invest in REITs or real estate? 

Investing in property is an excellent way to earn a passive income and diversify your portfolio. The two most popular ways to do so are to buy and own physical property or invest in Real Estate Investment Trusts (REITs.)

Additionally, REITs and real estate investment assets act as incredible inflation hedges. But, they generate differing returns, have varying liquidity levels, and require different degrees of experience. 

So, you need to do your homework before picking the best investment.

Here’s a detailed comparison of investing in REITs vs real estate, including their market performance, affordability, volatility, accessibility, and performance against inflation. 

We’ll also discover why you should add fine wine to your investment portfolio in 2022.

Investing In REITs Vs Real Estate: 6 Key Differences

Here’s a detailed comparison of investing in REITs and real estate across 6 different aspects:

Let’s get started.

1. Market Performance

With direct real estate investing, you can substantially increase your cash flow and earn a passive income. 

For example, imagine you pay $20,000 a year in debt payments on a property. If you rent it out for $30,000 a year, you’re making $10,000 in passive income.

Furthermore, direct ownership real estate investing allows you to take advantage of numerous tax breaks. This helps increase your income since you can deduct expenses involved with managing a real estate property.

Also, you get another large tax break for depreciation, which lowers your taxable income.

A real estate investment trust also pays significant dividends.

The FTSE Nareit Equity REITs index climbed 22.8% in 2022, thanks to a lower national interest rate and improving economic conditions.

Furthermore, you can receive a dividend yield of over 5.2% from a REIT stock like Great Ajax Corp.

However, in the last 20 years, the top private equity real estate investments have performed very well. They even outperformed the top REITs by 3.76%.

2. Performance Against Inflation

Both direct real estate investing and a Real Estate Investment Trust are excellent inflation hedges.

This is because the price of a real estate asset tends to increase with inflation. This is why your landlord can charge you more each year.

3. Affordability

Buying a real estate asset can be a bit expensive, and sometimes there are lots of hidden costs. 

As a real estate investor, you’ll have to sort out maintenance costs, pay real estate agents, and capital gain taxes. Furthermore, there will be times when you won’t be earning rental income on your investment property.

Luckily, you can offset the initial cost of the investment property with a mortgage. But, most mortgages would still require you to make a 20%-25% downpayment of the real estate property.

A real estate fund, on the other hand, requires minimal capital. REITs work similar to stocks, so you can choose to purchase more affordable REITs if you're worried about your cash flow.

Furthermore, various online trading platforms allow you to purchase fractional shares rather than an entire REIT share. Obviously, paying for a fraction of a REIT share is cheaper than paying for an entire one.

4. Liquidity

A private real estate investment is a long-term investment, which makes it a bit illiquid. That’s why an individual investor can find it a little tricky to invest in it.

Here are some of the reasons why direct ownership real estate investing can be illiquid:

• Long transaction times
• Significant transaction costs
• Long holding periods

On the other hand, a REIT investment is highly liquid. You can trade REITs publicly on a stock exchange with just the click of a button. So, you don’t have to wait weeks or months to sell a real property. 

Furthermore, you can buy or sell REITs in bulk. So, you can easily enter or exit a position when you want to.

5. Market Volatility

The real estate market is quite volatile. In fact, it has shaped the global economy with its ebbs and flows.

Remember the 2008 financial crisis?

Due to risky lenders defaulting on their real estate loans, the global economy was plunged into a recession. 

But are REITs any better?

Surprisingly not! 

Publicly traded REITs fluctuate in price and are influenced by broader trends. So, they tend to be more volatile than directly investing in real property.

Here are the four types of REITs you can invest in:

• Mortgage REITs: Mortgage REITs are companies that use short-term, low-interest loans to purchase existing loans. The loans they purchase have a higher interest rate.

The spread between each interest rate represents the profits. These REITs are leveraged as high as 5-to-1 and are fairly volatile.

• Equity REITs: An equity REIT investment is much less volatile because it specifically invests in income producing real estate.

You can choose which industry you want your equity REIT to invest in and take on more risk if you’re willing.

• Private REITs: A private REIT is exempt from SEC registration. Private real estate funds fall under non traded REITs, meaning a private REIT isn’t traded on the global stock market.
• Publicly traded REITs: Publicly traded REITs are listed with the SEC but don’t trade on a national stock exchange. In fact, over long periods, publicly traded REITs outperform private equity real estate investments.

Furthermore, publicly traded REITs are more volatile than a private REIT or a non traded REIT.

6. Accessibility

You can invest directly in real estate or REITs in various different ways.

• Purchase and sell private real estate properties (real estate flipping)
• Earn rental income by leasing out a rental property
• Purchase farmland
• Invest in income producing real estate (commercial property)

But, it's important to note that direct or commercial real estate investing requires some experience. Furthermore, a real estate investor needs to research which areas and properties will perform the best in the real estate market.

On the other hand, REIT investors require minimal expertise. You don’t have to be an accredited investor to become one of the many REIT investors.

You can let a real estate fund manager handle all the investment decisions and sit back as you earn a passive income. This is similar to a passive alternative investment like a mutual fund.

You also don’t have to worry about rude tenants destroying your rental property.

With all this in mind, REITs come out on top as the ultimate real estate investment.

Now, let’s look at another fantastic alternative investment - fine wine.

Why You Should Go For A Fine Wine Investment In 2022

Fine wine is an alternative investment opportunity that outperforms both REITs and real estate investments while offering more stability.

Here are some advantages of adding fine wine to your investment portfolio:

• Lucrative returns: In the first quarter of 2022, the Liv-ex 1000 index rose by 7.25%, with prices increasing each month. This is the broadest measure of the fine wine market.

Furthermore, the fine wine industry generated 13.6% returns over the last 15 years. That’s higher than both REITs and private commercial real estate investments.

• Steady price appreciation: Fine wines get better with age. Also, a bottle becomes rarer the longer you hold it because of consumption - hence your fine wine investment actually becomes more valuable over time. 
• Diversification: There are various wine producers, brands, and types to invest in. So, there’s plenty of diversification even within the fine wine market.
• Accessibility: You don’t have to be an accredited investor to put money into wine. You can invest in wine without even physically storing a bottle.

But how do you begin investing in fine wines?

The easiest way to embark on your fine wine investment journey is to partner up with a trusted wine investment platform like Vinovest.

Vinovest will procure, authenticate, and manage a portfolio of investment-grade wines for you. Its advanced AI-based platform compares thousands of bottles to select the best wines for you.

The best part?

With Vinovest, you can sell your wine when you like and exit your investment. However, fine wine usually reaches peak value after 5-20 years. To maximize your return on investment, Vinovest’s expert advisors will give guidance on the best liquidity options and time periods to sell. 

Diversify Your Portfolio With Alt Assets Like REITs & Fine Wine Today

Investing in real estate and REITs both have their ups and downs. REITs generate greater returns, are more affordable, and are easily accessible, but they’re also more volatile.   

Luckily, if you’re looking for a truly spectacular, stable alternative investment, fine wine provides a better investment opportunity.

Sign up with Vinovest today and invest in rare and authentic wines from around the world.