LTV and it’s benefits

[Diego Gutierrez]

Hello all, hope this finds everyone well. I am brand new to this realm, and have lots of questions. One thing I would like to understand better, is how do you use the LTV to your advantage? Thank you guys and gals for your time.

[Sam Lewis]

A common method in purchasing real estate is funding the deal up-front with a hard-money lender, fixing it up, then refinancing it with a loan. Here's a good example. You find a deal for 50K that needs 25K worth of work that should be valued at 100K when you're all finished renovating. 

So you're "all-in" 75K, with an ARV (After Repair Value) of 100K.

Boom. You're done the rehab, now what? Time to either (A) sell the property, or (B) refinance and rent the property. For option B, here's when LTV comes to play. When you refinance your newly renovated home (worth 100K) now, a new loan will be placed on the property, typically LTVs are between 65% and 80% on a newly renovated property. So if you're lucky, your LTV is 80%, which means your new loan is 80K, and you can "Cash-Out" the difference between your previous loan (the 75K, assuming you borrowed the purchase price (50K) + renovation costs (25K). So 80K (new mortgage loan) - 75K (old hard money loan) = 5K.

There you go... you just "made" 5K, and you're renting out your property with positive cash flow each month (ideally), and you still have about 20K worth of equity bundled up in your loan (the 20% you have sitting in the property). Now, if your LTV was lower, let's say 75%, you would pull out 0 dollars, since the 75K mortgage loan would be just enough to pay off your hard money lender. at 60%, you end up leaving 15K into the deal, since 60K-75K = -15K. Better LTV, greater leverage and ability to take as much money out of the deal as possible.

Hope this helps!

Sam