What does LTV mean?
LTV means loan-to-value ratio. This is the amount of loan divided by the appraised value of the property. This is the metric used by lenders including banks and private lenders to determine the maximum loan a borrower can receive.
How to calculate LTV?
To calculate the loan to value ratio, simply divide the loan amount by the appraised value.
For example, if an investment property appraises at $100,000, and the maximum LTV is 75%, then the lender is able to provide up to $75,000 loan. This means the borrower will retain $25,000 of equity in the property and will be responsible for servicing (paying down) a $75,000 loan plus the interest charged by the lender.
LTV is a fundamentally important consideration when taking on a real estate investment. Rental property investors that use the BRRR method try to build enough equity during the rehab phase to pull out all of their cash investment via a cash out refinance.
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