Loan-To-Value vs. Loan-To-Cost: What Investors Need to Know
Why These Ratios Matter
When you’re financing a fix and flip, two of the most important numbers your lender will look at are Loan-to-Value (LTV) and Loan-to-Cost (LTC). These ratios determine how much money you can borrow, how much cash you’ll need to bring to the table, and ultimately how profitable your project can be.
Understanding the difference between the two helps investors structure smarter deals and avoid costly surprises.
What is Loan-to-Value (LTV)?
Loan-to-Value measures the loan amount compared to the property’s value.
Formula: Loan Amount ÷ Property Value = LTV
Example: If you borrow $200,000 on a property valued at $300,000, your LTV is 67%.
Why it Matters for Investors:
Lenders use LTV to manage risk. Lower LTV means more equity in the deal, which typically qualifies you for better terms.
A high LTV leaves less equity cushion if the market shifts or resale takes longer than planned.
What is Loan-to-Cost (LTC)?
Formula: Loan amount ÷ (Purchase Price + Renovation Costs) = LTC
Example: You buy a home for $150,000 and budget $50,000 in rehab, for total costs of $200,000. If the loan is $160,000, the LTC is 80%.
Why It Matters for Investors:
LTC helps lenders evaluate how much “skin in the game” the borrower has.
A lower LTC signals the borrower is bringing more of their own funds.
For investors, LTC impacts how much cash you’ll need to close and fund renovations.
Key Difference between LTV and LTC
LTV is based on property value (as-is or ARV), while LTC is based on project costs.
Lenders may look at both ratios to decide how much financing to provide.
In a competitive market, lenders may cap your loan based on whichever ratio is more conservative.
Which Ratio Should Flippers Care About Most?
The answer is both.
LTV affects your exit: It determines how much equity you’ll have once the project is complete.
LTC affects your entry: It determines how much cash you need upfront to purchase and renovate
Smart investors analyze both ratios before committing to a project to ensure the numbers align with their profit goals.
The Bottom Line for Fix and Flip Investors
LTV tells you how leveraged you are against value.
LTC tells you how leveraged you are against costs.
Both ratios influence financing terms, risk exposure, and overall profitability.
Ready to run the numbers on your next deal? Call Barnett REI Finance at 224-205-7266 for a loan structured around your goals.