Property Development Investing: How Equity, Debt, and Timing Define Your Returns

by Michael Fuller

January 23, 2025

What is a fair return from an investment in a property development project?

Imagine you are invited to invest in one of our SDA housing development projects. Perhaps, you have been invited to invest in the development of a high-rise project as a capital or money partner. These are two very different projects with different risk profiles, time frames and complexity. 

What is a fair return to expect from one or more  projects competing for your capital?

When it comes to investing in a property development project there are so many variables at play, it’s easy to feel lost. The truth is, your returns depend largely on whether you invest as an equity partner or a debt provider, and at what stage of the project you get involved.

Early-stage investments offer higher returns but come with greater risks, while later-stage investments are safer but less lucrative. As someone who has analysed hundreds of development projects and placed significant investor capital in various projects from land subdivisions to high-rise luxury apartment developments (and everything in between), I’m here to simplify the process and help you understand how to balance risk and reward for maximum returns.

Here's a breakdown to help you assess what a fair return might look like:

Risks and returns for equity versus debt

Investing in property development projects can be highly rewarding, but it comes with significant risks. Determining a fair return for your investment starts with determining your position in the capital stack.

The capital stack broadly refers to the various forms of capital that are assembled to cover the total development costs such site acquisition, consultants fees, construction, sales and all the various other costs required to take a project from concept to completion.

Let's examine the returns associated with each of the categories of capital below:

inforgraphic illustrating the returns associated with different forms of project funding such as equity or debt.

Illustration of the different levels of investor returns depending on whether the capital invested is equity or secured debt. Returns are general in nature and depend on the project scope and risk levels. 

Equity Investors (10-20%+ returns):

  • Equity investors take the highest risk, as they are last in line to be repaid if the project fails. However, they also have the potential for uncapped returns if the project is highly successful.
  • Equity investors typically share in the profits of the project, so their returns depend on the final sale price of the developed property.
  • In early-stage projects (e.g., pre-approval or pre-construction), equity investors may expect returns closer to 20% or higher to compensate for the additional risk.

Preferred Equity (6-12% returns):

  • Preferred equity investors receive a fixed return before other equity investors and the developer are paid.
  • This position is less risky than pure equity but riskier than debt, as there is no security attached to the investment.

Senior Debt (4-10% returns):

  • Senior debt investors (e.g., banks or secured lenders) take the least risk, as their investment is secured by a first mortgage on the property.
  • Returns are typically lower, in the form of interest payments, but they are prioritised in repayment if the project fails.


Risks grow for each stage in the development lifecycle

The stage of the development lifecycle significantly impacts the risk profile and, consequently, the expected return. Earlier-stage investments are riskier and should command higher returns.

diagram illustrating the different stages in a property development projects and the level of risk associated with each stage

This graphic illustrates how your returns are affected by how advanced the project is when you invest and the type of debt or equity you invest.

Site Acquisition & Pre-Approval (Highest Risk):

  • Investing at this stage carries the most uncertainty, as the project may not gain council approval or may face delays. If the site is secured under option then their is a chance the developer may never settle the land.
  • Expected returns: 15-25%+ for equity investors, depending on the project's feasibility, market conditions and type of project e.g. a high-rise unit project or a single house for specialist disability accommodation (SDA).

Post-Approval & Pre-Construction (Moderate Risk):

  • Once council approval is secured, the risk decreases, but challenges like securing bank funding or pre-sales remain.
  • Expected returns: 12-20% for equity investors.

Construction Phase (Lower Risk):

  • Once construction begins, many of the major risks (e.g., approvals, funding) have been mitigated.
  • Expected returns: 8-15% for equity investors.

Post-Construction & Settlement (Lowest Risk):

  • At this stage, the project is nearly complete, and the primary risk is whether buyers will settle on time.
  • Expected returns: 6-12% for equity investors.

Market conditions determine returns on offer

Market conditions play a significant role in determining returns. In a booming property market, developers may offer lower returns because the risk of project failure is reduced. Conversely, in a weaker market, developers may need to offer higher returns to attract investors.

  • Strong Market: Returns may be at the lower end of the ranges mentioned above.
  • Weak Market: Returns may be at the higher end to compensate for increased risk.

Risk Assessment

When evaluating a property development opportunity, consider the following risks and how they might impact your returns. Below is a table summarising the key risks and their implications:

Risk TypeDescriptionImplications
Feasibility RiskIs the project financially viable? Are the cost estimates realistic?Overestimated profits or underestimated costs can lead to project failure.
Approval RiskWill the project gain necessary council or regulatory approvals?Delays or rejections can halt the project or reduce its profitability.
Pre-Sales RiskAre there enough pre-sales to secure bank funding?Insufficient pre-sales may lead to funding shortfalls or higher financing costs.
Construction RiskIs the builder reputable? Are there contingencies for delays or cost overruns?Delays or budget overruns can erode profits and delay returns.
Market RiskIs there sufficient demand for the end product at the projected sale price?Weak demand can lead to lower sales prices or unsold inventory.
Settlement RiskWill buyers settle on time at the contracted price?Failed settlements can delay returns and reduce overall profitability.


Questions to Ask the Developer

If you're being offered unusually high returns, it's essential to ask why. High returns often indicate higher risk. Key questions include:

  • Why are the returns higher than other similar projects?
  • What specific risks are associated with this project?
  • What is the developer's track record with similar projects?
  • How much equity is the developer contributing? (A developer with "skin in the game" is more aligned with your interests.)
  • What are the contingency plans if things go wrong (e.g., cost overruns, delays)?


Final Thoughts

A fair return for your investment in a property development project depends on your risk tolerance, position in the capital stack, and the stage of the project. As a general guide:

  • Equity Investors: 10-20%+ (higher for early-stage projects).
  • Preferred Equity: 6-12%.
  • Senior Debt: 4-10%.

Always ensure you thoroughly review the project's offer documents, understand the risks, and seek independent legal and financial advice before committing to any investment. If the returns seem too good to be true, they probably are—proceed with caution.

If you are interested in lower risk, shorter term projects that have a great ethical component to sweeten the returns then register your interest to co-invest with us in one of our projects with us. We have skin in the game and even the lenders rely on our location data to secure their investment (debt) in our projects.

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About the Author

Michael is one of our founding independent SDA Data experts and the founder of Boomscore.com.au, Australia's first AI property location scoring platform. With SDA Data, investors receive precise guidance on the optimal times and location to invest in SDA property, backed by Michael's expertise as featured in various property media. Now specialising in the SDA sector, Michael's research and insights help SDA property investors achieve zero tenant vacancy and higher net rental returns

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