Loan-to-Value Ratio Calculator
LTV calculations can tell you a lot about your financing options for acquiring an industrial property. Calculate your loan-to-value ratio here.
What Is a Loan-to-Value Ratio?
The loan-to-value, or LTV, ratio is a metric used to indicate the amount of financing compared to the value of an industrial property. It is one of the simplest metrics to determine, found by dividing the loan value by the property value.
Why Is Loan to Value Important?
An LTV ratio is a high-level indicator of lending risk: the higher the LTV, the riskier the loan. Many lenders set a maximum LTV for extending financing. If the loan-to-value ratio is above that amount, the lender could refuse to extend financing based on the risk involved. While there is no upper limit on what LTV a lender will accept, most lenders cap loans around 75% of a property’s value. Some, like CMBS lenders, may allow higher LTVs of up to 80%.
Knowing the LTV requirements of your lender is imperative. Calculating this metric enables you, as an investor, to see what your financing options are, whether it’s for an acquisition or a refinance. If you are seeking a loan with a lower LTV ratio, for example, you may be able to negotiate better terms, as lenders will see the financing as lower risk.
Note that construction loans do not often use LTV ratios, instead looking at loan-to-cost, or LTC, ratios. The cost variable is simply the total development cost of a project. Construction lenders that choose to use LTV ratios will base the calculations on the development’s finished, stabilized value.
What You Need to Calculate an LTV Ratio
To determine your return, you need two figures.
First, you need to understand the value of the property. If you’re acquiring an industrial asset, this would be the sale price. If you are refinancing, use the appraised value of the property.
Second, you need to know how much financing you require.
Once you have these data points, add them to the calculator below, or read further down to see a step-by-step calculation with an example.
LTV Ratio Calculator
Loan-to-Value Ratio Formula and Example
LTV Ratio = Financing ÷ Property Value
Let’s say you are looking at acquiring a distribution center with a sale price of $15 million. You are able to invest $3 million in cash, meaning the loan amount would be $12 million. To find your loan-to-value ratio, simply divide $12 million by the sale price of $15 million. This results in an LTV of 80%.
LTV Ratio = $12 million ÷ $15 million
As noted earlier, an 80% LTV ratio isn’t generally optimal. Many lenders would be hesitant about extending credit with that leverage. Because you’ve done your calculation, you know that you are more likely to land better financing terms if you took a loan at an LTV ratio of less than 75%, and the lower the better.
Based on this result, you may wish to look at securing investment partners — perhaps through a joint venture — or putting more skin in the game, if possible. Alternately, it may be a good idea to assess acquiring a different type or class of asset.