Loan-to-Value 'LTV'

LTV is a metric used by lenders and the market to indicate, on a percentage basis, how much leverage or debt a property has on it relative to its total value. Here's the formula. It's pretty simple. Loan amount divided by the property value. Or in the case of an acquisition, it would just be the loan amount divided by the purchase price.

Here's an example. Imagine you have a property with a value of $1 million and you're getting a loan for, say, 600,000. That would indicate that the loan divided by the property value is an LTV of 60%. Most lenders use LTV as a limit as to how much they will lend against a property when either buying or refinancing. So in investment real estate, typically we see maximum LTVs in the 70 to 80% range, which means that the total amount of the loan relative to the value cannot exceed 70, 75, 80% depending on what that lender's particular limit is.

In addition to LTV that we calculate, there's also another term that's related to it called CLTV, which is the cumulative or combined loan to value. An example there would be taking this previous situation, imagine we have a $600,000 first mortgage and then another second mortgage for, say, 150,000. That would be a 15% LTV and the total combined CLTV would be 75%. 750,000 divided by 1 million, cumulative combined LTV of 75%.

LTV is very commonly used throughout the industry. It's important to note that lenders always have a max LTV that they will allow for leverage or debt to be placed on a property. So understanding that prior to acquisition can be very important. This has been a quick overview of Loan to Value. Thanks for watching.

Trevor Calton is the founder of Real Estate Finance Academy. Since 1997, he has analyzed, acquired, or sold more than $5 billion of commercial real estate assets, financed over 500 commercial investment properties, and overseen the asset management of over 6000 units of multifamily housing.

He has been teaching commercial real estate classes and training professionals since 2005. His commercial real estate classes and real estate finance development program helps people at all levels develop a successful real estate investment strategy.