How retail investors can learn from institutions to improve real estate returns

A long-running lesson from Dalbar’s investor-behaviour research is that returns are often lost not in the market, but in the way people use it. The firm’s latest report said the average equity fund investor lagged the S&P 500 by 8.48 percentage points in 2024, finishing on 16.54% against the index’s 25.02%. That was the second-largest gap in a decade and another reminder that emotional decisions can be costly.

The same pattern plays out in real estate, where the surface appeal of tangible assets can hide a familiar problem: many smaller investors are trying to compete in a field shaped by institutions with deeper resources, cheaper capital and better access. JPMorgan has described large investors such as pension funds and sovereign wealth funds as major players in property markets, while SoFi notes that they typically benefit from professional research, bigger pools of capital and access to deals that are not generally open to ordinary investors.

That structural divide matters because real estate returns are often sold on the basis of headline yields. A projected 16% internal rate of return can look irresistible beside a steadier 8% distribution, but the higher number may depend on optimistic rent growth, aggressive refinancing assumptions or a smooth exit in a tougher lending environment. By contrast, a more conservative deal may offer lower upside but also less room for the sort of execution risk that can erode returns.

Institutions tend to approach that trade-off with far more scepticism. They look first at whether the sponsor has meaningful personal capital at stake, whether the debt stack can survive higher rates, and whether the operator has already navigated problems on earlier deals. They also examine the management platform itself, because a polished pitch deck means little if the property manager cannot control vacancies, collections and repairs.

Market selection is another dividing line. Institutional investors usually want locations with job growth, rising incomes and limited new supply, rather than the cheapest entry point on a map. Retail buyers, by contrast, often chase yield and assume the neighbourhood will take care of itself. In practice, the asset may be less important than the discipline behind the purchase.

There are ways for smaller investors to narrow the gap. RealVantage says institutional-style property investing usually relies on scale, diversification and professional management, while Delaware Statutory Trust structures, as Kiplinger has reported, can give accredited investors access to large assets managed on a pooled basis. Even so, the lesson is not that retail investors must copy institutions exactly. It is that they must borrow the habits that make institutional capital harder to beat: slower decisions, tougher underwriting and less faith in projections that look too good to be true.