Loan to Cost (LTC) Ratio Definition
When it comes to financing a real estate project, the Loan to Cost Ratio (LTC) is an important factor to consider. As a real estate investor, you’ll need to understand what this ratio is and how it relates to your loan, as it will affect the amount of money you need to borrow. In this article, we’ll be explaining what the LTC ratio is and how it’s calculated so that you can make informed decisions about your investing needs.
What Is the Loan-To-Cost Ratio (LTC)?
So what does loan to cost mean? The Loan-To-Cost Ratio (LTC) is a financial metric used in real estate investing. It measures the amount of money borrowed for a real estate investing project against the total cost of that project. The LTC ratio can vary from lender to lender but typically ranges from 75% – 85%.
The Formula for LTC
The loan to cost real estate equation breaks down into two parts, total costs of the real estate project and total loan amount requested. To calculate the LTC ratio you divide the loan amount by the total cost of the project. This will give you your percentage value for LTC ex a Loan-To-Cost Ratio value of 75% means that 75% of your projects costs are covered by borrowing and 25% comes from equity.
What Does the Loan-To-Cost Ratio Tell You?
A crucial question that can’t be left unanswered is “What does LTC mean in real estate?”. This ratio tells you how much of the total cost of a project is funded by debt financing versus equity financing. It’s important to note that this doesn’t take into account any closing costs associated with obtaining the loan. Those need to be factored in separately. Knowing this can help you make sure that your investment remains on track and profitable.
Example of How to Use LTC
To illustrate, let’s look at a loan to cost example in practice. Suppose you’re looking at investing in a new apartment complex construction project with an estimated total cost of $10 million. To fund this project, you take out a loan for $7 million and invest $3 million of your own capital into the deal. In this case, your Loan-to-Cost Ratio is 70% ($7M/$10M). This means that 70% of the funding for this project comes from debt and 30% from equity.
What is the Difference Between LTV and LTC?
Loan To Value (LTV) and Loan To Cost (LTC) are two common terms used in real estate, but what is the difference between them? Knowing how they work can help you make an informed decision when it comes to investing in a property. LTV is a ratio that compares the loan amount to the estimated value of a property. It’s typically expressed as a percentage and represents how much of a mortgage loan you can get on your property. For example, if your property is valued at $300,000 and your loan amount is $280,000, then your LTV would be 93%. On the other hand, LTC is also a ratio that compares your loan amount to costs incurred while acquiring or renovating an investment property.
Whether to Use loan to cost (LTC) or loan to value (LTV)?
When evaluating a loan, lenders consider both the Loan to Cost (LTC) ratio and the Loan to Value (LTV) ratio. While both are important metrics in assessing risk, they measure different aspects of a loan.
The LTC ratio is used to determine how much of a loan will be required for a project. It takes into account all costs related to completing the project, such as land purchase, construction costs and closing costs, and calculates what percentage of those costs need to be covered by a loan. The higher the LTC ratio is, the greater amount of financing needed for the project.
On the other hand, the LTV ratio measures how much value an asset has compared to its outstanding loan balance. This metric is often used by mortgage lenders in order to assess risk associated with lending against an asset’s value.
Conclusion
That being said, the LTC ratio is an important metric to keep in mind when financing a new project. Having too high of an LTC ratio can reduce the amount of money you can borrow, and it can require you to have more equity invested in the project than you originally planned. Taking the time to understand your LTC ratio and what it means for your business will help you make informed decisions about your lending needs, and that’s always a good thing.
Get some insight on real estate investing, by checking out our Tips On Getting A Loan article.
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Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.
