The loan-to-cost ratio (LTC) is the number of debt investment dollars divided by the total cost of a project. As a result, LTC helps lenders determine how much they’d be willing to budget toward their project participation. In the case of real estate crowdfunding, crowdsourced investors also examine an investment project’s LTC as a form of due diligence. An exceptionally high LTC could indicate an over-leveraged loan or borrower.
Loan-to-cost ratio formula
To calculate LTC, use this equation:
LTC = loan amount ÷ total project cost
Total project cost includes the costs of purchasing the property, of course, as well as any further construction, demolition or renovation. It also includes any related design, engineering and permitting costs.
Loan amount refers to the total amount of debt capital lenders put toward the project. Investment-to-cost ratio (ITC) is the analogous formula for equity investment.
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