There's an important number your lender will review when considering your fix and flip loan request: your project's Loan-to-Value (LTV). Loan-to-Value (LTV) is a metric real estate lenders use to gauge and manage risk. Whether you’re a buyer or a lender, understanding LTV can help you protect your investment.
What does Loan-to-Value mean?
LTV is a simple ratio used to show the lender's loan amount compared to the value of the property. LTV is one of the methods used by conventional and private lenders to determine the loan’s perceived risk. A lower LTV indicates that you, as the borrower, have more protective equity in the property to secure the loan.
As an example, consider a property estimated to be worth $100,000. A lender that requires a 70 percent LTV would loan you $70,000 on that property.
$70,000 / $100,000 = 70%
For fix and flip and construction loans, the LTV will likely be calculated two ways - once based on the as-is value of the property and once on the as-renovated (or as-built) value. The as-renovated LTV will typically be the more important of the two ratios, but the as-is LTV will dictate how much money you must put down at closing.
Extending the previous example, a lender may allow a 90% as-is LTV (meaning that you have to put down 10% at closing) provided that the rehab or construction plan will produce a LTV of 70% or less at completion. If you obtain a loan from LYNK Capital, we will provide a Loan Proposal for each property showing the maximum LTVs applicable at each stage (click here to get pre-approved).
Why do lenders care about LTV?
Your fix and flip lender is looking for indicators that your project will be successful. When a borrower has substantial equity in their property, they are less likely to default on the loan and, in the event that the borrower does default, the lender's capital will be well protected by the property value.
Why should you care about LTV?
Much like lenders, property buyers need to think about protecting their capital. How much are you investing relative the property's ultimate value and will your capital be safe? When evaluating a potential purchase, consider how much money you'll have invested (the cash you've invested plus the amount of any loans you'll obtain) - if this number is greater than 80-85% of the expected as-renovated value, your capital is more at risk. Don't forget to consider things like real estate commissions, cost overruns, and the costs of interest on your loans.
More helpful tips and advice like this are availble in our Fix & Flip Academy.
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