Loan-to-value ratio, commonly known as LTV, is a financial term important amongst real estate professionals and financial lenders. As the name alludes to, it is the ratio of a loan to the value of an asset. In real estate terms, it is the percentage of the property that is mortgaged. The calculation for LTV is quite simple: if a home is valued at $200,000 and the loan on that property is $160,000 then the LTV ratio is 80%. Lenders in most cases will not lend higher than an 80% LTV ratio, therefore the investor will have to use their own funds for the remaining 20% of the asset value. Lenders view a lower LTV ratio as more secure investment and a higher LTV beyond 80% as a greater risk of default. In some cases, lenders may lend beyond an 80% LTV but at a higher interest rate due to its risk profile. From an investor’s perspective, when they are evaluating a property the LTV ratio can quickly show the amount of owner equity in the project.

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For Paragon’s single family home portfolio we estimate an LTV of 75% for our model. We subsequently use our existing capital or equity to fund the remainder 25% of the property value. This ensures banks are comfortable and willing to lend us capital and will offer us favorable interest rates which increases the profitability of our projects.