Ever wonder how lenders decide how much they’re willing to give you for a real estate project? It all starts with something called Loan to Cost (LTC), a ratio that compares the loan size to the total cost of a real estate project.
At ABL, we want our borrowers to succeed. That’s why we use metrics like LTC to quickly ensure you’re not taking on unnecessary risk by overleveraging yourself. Whether you’re renovating a property to flip or building one from the ground up, our loan programs offer financing that is fast, flexible, and responsible.
What Is Loan to Cost?
Loan to Cost (LTC) is a ratio that compares a real estate loan amount to the total cost of the project being financed. That way, you know what proportion of the project is funded by debt vs. equity.
For example, if a project costs $200,000 and you get a loan for $150,000, 75% of the project is being financed. Meanwhile, the borrower must come up with the remaining 25% in the form of a down payment, giving them “skin in the game.”
How to Calculate Loan to Cost
To calculate Loan to Cost, divide the loan amount by the total project cost:
Loan to Cost = Loan Amount / Project Cost
In our last example, this would be $150,000 divided by $200,000, which equals 0.75. To get a percentage, simply multiply 0.75 by 100, which equals 75%.
Loan to Cost vs. Loan to Value: What’s the Difference?
If you’re confusing LTC and LTV, don’t worry. You’re not alone. Loan to Cost (LTC) and Loan to Value (LTV) are related but slightly different metrics.
LTC compares the loan amount to the total project costs, while LTV compares the loan amount to the property’s expected after-repair value (ARV). For example, if a property will be worth $250,000 after repairs and you get a loan for $150,000, the LTV is 60% ($150,000 / $250,000).
At ABL, we use LTV and LTC to evaluate loans. For a fix-and-flip loan, for example, we offer LTVs of up to 90% of the purchase price and 100% of the rehab costs and LTCs of up to 92.5%.
Why Loan-to-Cost Matters to Real Estate Investors
As a real estate investor, lenders’ LTC requirements tell you how much capital you need to bring to the table. Think of them as the inverse of a down payment requirement. If a lender requires an LTC of 80%, that’s the same as requiring a 20% down payment.
Now that you know how to calculate LTC, you can quickly analyze how feasible a deal is. For instance, if you have a set amount of capital available, you can only take on projects up to a certain price point before a high LTC will keep you from qualifying for financing.
If you know a lender’s LTC requirement, you can also estimate ROI. After all, the level at which a project is funded by debt can significantly impact your final returns. For example, sometimes financing through a lender like ABL can lead to positive leverage that boosts your returns.
What Is a Good Loan-to-Cost Ratio?
There is no industry standard for what constitutes a “good” LTC. The answer to this question varies by market, project, and borrower. That’s why ABL provides loans tailored to you and your project. We want you to get the best financing for your situation.
That said, we offer hard money loans with LTCs of up to 92.5%. It all depends on the project’s return potential and your commitment to the deal. Interested in learning more? Contact one of our loan experts, to see what kind of real estate financing you qualify for.
3 Tips for Improving Loan-to-Cost
If your LTC is too high to qualify for a loan, here are some ways to improve it:
- Negotiate a better purchase price. If you can get the seller to lower the property’s price, you can lower the deal’s overall cost and the LTC by extension. Try making the deal attractive by offering cash or a quick closing timeline.
- Bring in a capital partner. If you can’t bring enough capital to the table on your own, consider partnering with another investor. They may be willing to contribute some of the equity in exchange for a proportional share of the profits.
- Lower renovation or construction costs. This reduces the total project cost and LTC. Try getting more quotes from contractors and suppliers and negotiating better deals. Every bit you save helps.
Common Misconceptions about LTC
Whatever you do, don’t fall for these common myths about LTC:
A lower LTC is always better
Not necessarily. While a lower LTC means less risk, it also means less potential return. Some projects perform better when they have the right balance between equity and debt, regardless of how much you’re able to put down.
The total project cost only includes purchase price and construction costs
Many investors overlook soft costs like permits, insurance, taxes, and utilities when calculating LTC. However, lenders like LTC look at all of these costs before approving a loan.
If I get rejected based on LTC, the deal must not be worth doing
Not necessarily. A high LTC might simply mean you need to contribute more cash or restructure the deal. It doesn’t automatically make the project itself bad. At ABL, we can help you keep the deal alive by walking you through your best funding options.
Finance Your Next Real Estate Project with ABL
Deals move fast in real estate. To seize opportunities before they’re gone, you must act quickly. That’s why we offer some of the fastest real estate loans available. Just give us some basic information about the deal, and we’ll tell you what LTC you need to have. Then, if we’re a good fit, we can close the loan in as few as 30 days.