When a high net worth investor is considering whether to invest in an equity or debt position, they must first understand one fundamental rule: a higher return on investment means higher risk in the investment, while lower risks will offer lower returns. These two elements (risk and return) are always corresponding, meaning that one can never increase their return while simultaneously decreasing the risk of their investment. If project is providing insurances or securities to the lender or investors, then we must also reduce the return on investment.
When there is a strong project underway in which the builders themselves already have a high amount of equity and the Performa projects high profits, the developer will be less likely to offer investors a high rate of return. Conversely, when a developer does not feel confident in the project or is not comfortable with fully assuming the risk involved, they will be more willing to share their profits with investors by offering them a higher rate of return to generate more funds for the project, reducingthe risk for themselves. Thus, whenever an investor sees that a developer is offering unusually high returns on their projects, this is usually a cause for concern.
