Understanding Loan to Cost in the Real Estate Industry

Loan to cost (LTC) is a measure of how much debt a lender is willing to provide for a real estate project. LTC is an important factor for investors to consider when evaluating financing for a real estate investment.

Several factors can affect LTC in real estate, including the type of property, the location of the property, and the lender’s risk appetite. In general, lenders are more willing to provide loans with a lower LTC ratio because it limits the lender’s risk while ensuring that the investor still has skin in the game.

How to Calculate Loan to Cost

LTC is calculated by dividing the loan amount by the total cost of the project. For example, if a project costs $1 million and the lender is willing to provide a loan of $700,000, the loan to cost ratio would be 70%.

Costs can include the purchase price of a property or lot, along with any rehab or construction costs. Basically, the costs that the investor is taking on to acquire and upfit the property go into the cost calculation.

A lower LTC ratio indicates the project has a lower risk, and the investor will need to provide more of their own equity. A higher LTC ratio indicates that the project is riskier because the lender is financing a larger portion of the costs.

By understanding LTC and how it can affect a real estate investment, investors can make more informed decisions about where to invest their money.

What is LTC in Real Estate?

Using LTC to create leverage can be a valuable tool for real estate investors who are looking to scale their business and maximize their returns.

By understanding LTC and how it can affect an investment, investors can make more informed decisions about where to invest their money in real estate.

The ideal LTC ratio will vary depending on the type of project and the lender’s risk tolerance. However, a good rule of thumb is to keep LTC below 80% on properties that depend on as-is value.

This will help to ensure that the project is financially feasible and that the lender is comfortable with the level of risk.

LTC vs. LTV

LTC and loan to value (LTV) are two important financial ratios used in real estate lending. LTC compares the amount of a loan to the total cost of a property, while LTV compares the amount of a loan to the appraised value of a property after repairs. This is often called after-repair value and measured in an LTARV ratio. Both the loan to cost ratio and loan to value ratio can be used to assess the risk of a loan and the amount of equity that an investor has in a property.

Here is a more detailed explanation of LTC and LTV:

Loan to Cost Meaning (LTC)

  • LTC is typically used for real estate investment properties that are ready to cash flow as is. This can include single-family rentals as well as many multifamily properties.
  • LTC is calculated by dividing the loan amount by the total cost of the property.

Loan to Value Meaning (LTV)

  • LTV is typically used for residential real estate loans that include work on the property—whether as part of a flip, a value-add multifamily rehab, or a new construction project.
  • LTV is calculated by dividing the loan amount by the appraised value of the property. The appraised value is an estimate of the property’s future market value after the investment work is complete, as determined by a third-party appraiser.

Loan to Cost Ratio for Construction Loans

The typical loan to cost construction loan ratio varies depending on a number of factors, including the type of project, the lender, and the borrower’s credit score.

An LTC will typically be higher than an LTV, because the costs of a project are certain while the value in the future after repair or construction could fluctuate based on how market factors change, how long construction takes, etc.

Lima One, for example, offers up to 85% LTC and up to 70% LTV on our new construction loans.

For borrowers, LTC as well as LTV can be a helpful tool for understanding the risks and rewards of a particular construction project.

The Lima One Advantage

Overall, LTC is a valuable tool for real estate investors. By understanding LTC real estate and how it can affect an investment, investors can make more informed decisions about where to invest their money and how to best leverage the equity in their real estate portfolios.

When it’s time for your next rental purchase, portfolio refinance, fix and flip, or new construction project, it’s important to remember two things: your LTC/LTV and new construction loan are only as good as your lender. 

Lima One Capital has the right financing options for you. Our versatile suite of products is designed to help investors regardless of their investment strategy. Contact us today to discuss your next deal, or if you have a deal in hand, accelerate the process by applying now.