Introduction: Why Loan to Cost Matters in Real Estate
If you’ve ever wondered how banks and lenders decide how much they’re willing to lend on a real estate project, you need to understand Loan to Cost (LTC). It’s one of the most important financing metrics for real estate investors, especially those involved in fix-and-flips, new construction, or value-add commercial properties.
In this guide, I’ll break down what LTC is, how to calculate it, why it matters, and how it compares to Loan-to-Value (LTV). By the end, you’ll know how to use this financing metric to make smarter investment decisions.
What is Loan to Cost (LTC) in Real Estate?
Loan to Cost (LTC) is a financing ratio that compares the loan amount to the total cost of a real estate project. It tells lenders how much of a project’s total cost they are willing to finance.
LTC Formula:
LTC=(Loan AmountTotal Project Cost)×100\text{LTC} = \left( \frac{\text{Loan Amount}}{\text{Total Project Cost}} \right) \times 100LTC=(Total Project CostLoan Amount)×100
- Loan Amount: The amount borrowed from the lender.
- Total Project Cost: Includes the purchase price, renovation costs, construction costs, and soft costs (like permits, legal fees, and inspections).
Example of LTC Calculation:
Imagine you’re developing a multifamily property, and your total cost is $1,000,000 (including land, materials, labor, and fees). A lender agrees to provide $700,000 in financing.
LTC=(700,0001,000,000)×100=70%\text{LTC} = \left( \frac{700,000}{1,000,000} \right) \times 100 = 70\%LTC=(1,000,000700,000)×100=70%
This means the lender is financing 70% of the project costs, while you need to bring in 30% as equity.
Why Does LTC Matter for Real Estate Investors?
1. Determines How Much You Need to Invest
A higher LTC means you need less capital upfront, while a lower LTC means you need more of your own money.
2. Affects Loan Approval
Lenders use LTC to assess risk—the higher the LTC, the riskier the deal for them. Most lenders cap LTC between 65% to 85%, depending on the asset type, location, and borrower experience.
3. Impacts Loan Terms
- Higher LTC (75-85%) → More leverage but potentially higher interest rates and stricter underwriting.
- Lower LTC (50-65%) → Less leverage but better loan terms (lower interest, longer amortization).
4. Helps Compare Financing Options
If two lenders offer different LTCs, you can evaluate which loan gives you better leverage while keeping your equity investment reasonable.
LTC vs. LTV: What’s the Difference?
A lot of investors confuse Loan to Cost (LTC) with Loan to Value (LTV), but they’re not the same.
| Metric |
Formula |
What It Measures |
Used For |
| Loan to Cost (LTC) |
Loan Amount ÷ Total Cost |
Compares loan to project cost |
Development & renovation projects |
| Loan to Value (LTV) |
Loan Amount ÷ Property Value |
Compares loan to current/future value |
Buying stabilized properties |
Example of LTC vs. LTV in Action
Let’s say you’re buying a distressed property for $500,000 and plan to spend $200,000 on renovations. After rehab, the property is worth $900,000.
-
LTC Calculation: If a lender offers 75% LTC on total costs of $700,000, they would lend:
75%×700,000=525,00075\% \times 700,000 = 525,00075%×700,000=525,000
-
LTV Calculation: If the lender instead offers 70% LTV based on the after-repair value (ARV) of $900,000, they would lend:
70%×900,000=630,00070\% \times 900,000 = 630,00070%×900,000=630,000
In this case, LTV-based financing provides more leverage. However, most construction and value-add loans are based on LTC, not LTV.
Typical LTC Ranges for Different Real Estate Loans
| Loan Type |
Typical LTC Range |
| Hard Money Loan |
65-85% |
| Bridge Loan |
70-80% |
| Construction Loan |
70-85% |
| Commercial Loan |
65-75% |
| SBA 504 Loan |
Up to 90% |
Lenders prefer lower LTC for riskier projects like ground-up construction, while they may offer higher LTC for experienced investors with a strong track record.
How to Get the Best LTC for Your Real Estate Project
1. Improve Your Experience & Track Record
Lenders are more likely to offer higher LTC (80-85%) if you have a history of completing similar projects successfully.
2. Provide a Strong Pro Forma & Business Plan
A detailed pro forma showing project costs, timeline, and expected returns helps lenders feel more comfortable increasing LTC.
3. Work with a Private or Hard Money Lender
Banks are conservative with LTC, but private and hard money lenders often offer higher LTC (sometimes up to 90% for experienced investors).
4. Offer Additional Collateral
If you own other real estate or assets, you may be able to negotiate higher LTC by securing the loan with more collateral.
5. Consider Seller Financing to Reduce Upfront Costs
Sometimes, sellers may agree to finance part of the deal, allowing you to combine it with an LTC-based loan to reduce out-of-pocket expenses.
Common Mistakes Investors Make with LTC
❌ Ignoring Soft Costs
LTC includes permits, legal fees, and interest reserves, so don’t underestimate your total project costs.
❌ Overestimating After-Repair Value (ARV)
Lenders calculate LTC based on actual project costs, not future value—so make sure your numbers are realistic.
❌ Not Having Enough Reserve Capital
Even if you secure high LTC financing, lenders expect you to have cash reserves to cover unexpected expenses.
Conclusion: Mastering LTC for Real Estate Success
Understanding Loan to Cost (LTC) is critical for securing the right financing for fix-and-flips, new construction, and commercial real estate projects.
- LTC tells lenders how much of a project’s cost they will finance.
- It’s different from LTV, which is based on property value.
- The best LTC deals go to experienced investors with strong business plans.
Want to learn more about real estate financing? Let me guide you at propertyprofitacademy.com!
