Real Estate Investing QuickStart Guide by ClydeBank Media

Author:ClydeBank Media [He, Symon]
Language: eng
Format: epub
Published: 2020-07-12T20:23:07+00:00

The DSCR doesn’t account for the appreciating value of the property, only the actual money coming in and going out from annual rental income and operating expenses.

Q: What is the loan-to-cost ratio you need?

Typically, you’ll see lenders advertising the loan-to-cost ratio (LTC) for their loans. This is the amount that lenders are willing to lend in proportion to the total costs of the project.

Let’s say that a loan is offered at an LTC of 80 percent. If the total cost of the project is $100,000, the bank is willing to lend out $80,000. The total cost of the project includes many line items, such as purchase price; soft costs (legal, architectural, surveying, etc.); furnishings, fixtures, and equipment (FF&E); closing costs; and liability insurance costs. This is a different calculation from the loan-to-value ratio, which banks offer against the value of the property. As you can imagine, the value of a property often exceeds the cost of purchase and rehab; therefore, you might have access to more funding with the LTV.

Kathy is calculating the LTC for her investment to see if it will comply with the bank’s 80 percent LTC loan requirement. She has a total of $50,000 in capital available for this investment. That leaves her with enough room to borrow up to $200,000 if she can demonstrate that her total project costs are $250,000 or less. The property has a purchase price of $190,000, and she estimates that she’ll need $30,000 for rehab and a further $5,000 for soft development costs.

Total cost of the project: $225,000

80% LTC loan amount: $180,000

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