Knowing the many factors in place when planning a new construction or rehabilitation project is important for receiving a commercial real estate loan. Commercial real estate is highly profitable, but it comes with risks—no one wants to be on the losing end. Conditions can ensure lenders get the best odds when lending to eager entrepreneurs.
Here’s a brief guide to the loan-to-cost (LTC) ratio and how it can affect your commercial real estate plans.
What Is LTC in Commercial Real Estate?
The loan-to-cost (LTC) ratio calculates the percentage of a project’s loan in the total project cost. A higher LTC means a higher risk for the lender, and a lower ratio is more favorable. Your LTC is essential to determining your qualifications for a loan. However, the value and location of the property in question will also decide whether the lender wants to take a risk.
Why Is It Important in Commercial Real Estate?
When creating a budget for your next project, it’s important to think about the possible expenses that may arise. You must include the cost of labor, materials, impact fees, insurance costs, and other possible fees when determining the value of the loan you’ll need.
The LTC ratio helps lenders calculate how much of the project depends on the loan. This will estimate the risk of this project on your and the lender’s finances. Knowing the LTC ratio will prevent you from getting into a financial situation you’re not ready for.
What Are the Benefits of a Loan-to-Cost Ratio?
A loan-to-cost ratio is a great tool for lenders and brokers to determine the funds they can provide to your project. Then, they can compare different projects and assess the risk they’re willing to take—allowing them to make the best financial decision. Borrowers can also benefit from the LTC ratio, and they’ll have something to work toward when building their property portfolio.
We hope our brief guide to loan-to-cost ratio simplifies the search for loans that fit you and your projects. Find the best strategies for managing an LTC ratio in commercial real estate by working with professionals. Our team of private money brokers at Val-Chris Investments always looks forward to helping you. Build your property portfolio with us, and don’t hesitate to contact us with any questions; we’ll happily answer!