LTV is short for "Loan-to-Value", and it comes up a lot in Real Estate investing. The higher the LTV, the higher the risk is for the lender
LTV is short for “Loan-to-Value”, and it comes up a lot in Real Estate investing. LTV is expressed as a percentage, and you calculate it by dividing the amount of the loan by the price paid for the property. For example, if you want to buy a home for $200,000 and put down 20% ($40,000), then your loan is $160,000, and your LTV is 80%.
The higher the LTV is, the higher the risk is for the lender on the loan.
One reason it’s important to understand this number in the context of crowdfunded investments is that in some types of investments, you are essentially becoming the lender, so it’s useful to know how much risk you’re taking on relative to the return on your investment.
While an 80% LTV is quite common in standard residential mortgages (the kind you get to buy your own personal residence), most loans offered to borrowers who intend to rehab (flip) the property or rent it out to tenants have a lower maximum LTV – 70%-75 % is common. High LTVs are a signal of high risk, so if you sign on for an investment at a high LTV, be sure you understand the return you’re getting in exchange for that higher risk.
A related (but distinct) term to LTV is ARV, or After-Repair Value. Many lenders express their loan terms using LTV, ARV, or both.
Want to learn more but aren’t sure where to start? You can explore 162 crowdfunding investment platforms in our database and learn more about the nuts and bolts of crowdfunding and alternative investing on our blog. Did you know you can use a self-directed retirement account to invest in many alternative investments? Rocket Dollar makes it easy, and when you sign up using that link you'll be helping to support YieldTalk.