LTV vs. ARV: Understanding Loan-to-Value in Hard Money Lending
Master the key metrics in hard money lending. Learn the difference between LTV and ARV, and how lenders use these ratios to structure your loan.
Dan McColl
Director of Construction Lending
Understanding LTV and ARV
Two of the most important metrics in hard money lending are LTV (Loan-to-Value) and ARV (After-Repair Value). Understanding these ratios helps you know how much you can borrow and structure your deals effectively.
What is LTV (Loan-to-Value)?
LTV is the ratio of your loan amount to the property's current value.
Formula:
LTV = Loan Amount ÷ Current Property Value
Example:
●Property value: $500,000
●Loan amount: $375,000
●LTV: $375,000 ÷ $500,000 = 75%
Why LTV Matters
LTV represents the lender's risk exposure:
●Lower LTV = More equity cushion = Lower risk
●Higher LTV = Less equity cushion = Higher risk
Most hard money lenders cap LTV at 65-75% for purchase loans.
What is ARV (After-Repair Value)?
ARV is the projected value of a property AFTER renovations are complete.
Formula:
ARV = Current Value + Value Added by Renovations
Example:
●Purchase price: $400,000
●Renovation budget: $100,000
●Projected ARV: $650,000
How ARV is Determined
Lenders and investors calculate ARV using:
●Comparable sales - Recent sales of similar renovated properties
●Market analysis - What buyers will pay in that area
●Scope of work - What improvements create what value
LTV vs. LTARV: The Key Difference
Hard money lenders typically quote one of two metrics:
LTV (Loan-to-Value)
Loan based on CURRENT property value
●Used for: Stabilized properties, refinances, simple purchases
●More conservative approach
LTARV (Loan-to-After-Repair-Value)
Loan based on FUTURE (post-renovation) value
●Used for: Fix and flip, value-add projects
●Allows higher loan amounts relative to purchase price
Practical Examples
Example 1: Bridge Loan (LTV-Based)
You're buying a stabilized rental property:
●Purchase price: $600,000
●Property is move-in ready
●No renovation planned
●Lender offers 70% LTV
Loan calculation:
●$600,000 × 70% = $420,000 loan
●You bring: $180,000 down payment
Example 2: Fix and Flip (LTARV-Based)
You're buying a fixer:
●Purchase price: $400,000
●Renovation budget: $100,000
●ARV: $650,000
●Lender offers 65% LTARV
Loan calculation:
●$650,000 × 65% = $422,500 total loan capacity
●Enough to cover purchase ($400,000) plus some renovation ($22,500)
●You bring: Cash for remaining renovation plus reserves
Example 3: Combined Approach
Many lenders use multiple caps:
●Maximum 90% of purchase price
●Maximum 100% of renovation costs
●Maximum 65% of ARV
Deal structure:
●Purchase: $400,000 (90% = $360,000 financed)
●Renovation: $100,000 (100% = $100,000 financed)
●ARV: $650,000 (65% = $422,500 cap)
●Total loan: $422,500 (limited by ARV cap)
●Your cash: $77,500 minimum
How to Calculate Your Loan Amount
Step-by-step process:
Step 1: Determine Current Value
●Purchase price or
●Appraised value
Step 2: Estimate ARV
●Research comparable sales
●Add realistic value for improvements
●Be conservative
Step 3: Calculate Renovation Budget
●Get contractor bids
●Add contingency (10-20%)
Step 4: Apply Lender's Ratios
●Check LTV caps
●Check LTARV caps
●Check purchase price percentage
Step 5: Find the Limiting Factor
●The lowest calculation is your maximum loan
●Plan your capital accordingly
LTV/ARV by Property Type
Different property types have different typical limits:
| Property Type | Typical LTV | Typical LTARV |
|---|---|---|
| Single Family Fix & Flip | 70-75% | 65-70% |
| Single Family Rental | 70-75% | N/A |
| Multi-Family | 65-70% | 60-65% |
| Commercial | 60-70% | 55-65% |
| Land | 50-60% | Varies |
| Construction | N/A | 60-65% |
Impact on Your Cash Requirements
Understanding these ratios helps you plan capital:
Lower LTV/LTARV = More Cash Needed
●More of your own money in the deal
●Lower interest costs (smaller loan)
●More cushion if things go wrong
Higher LTV/LTARV = Less Cash Needed
●Leverage more of other people's money
●Higher interest costs
●Less room for error
Tips for Maximizing Your Loan
1. Accurate ARV Analysis
Provide solid comparable sales supporting your ARV. The better your data, the more confidence in higher LTARV.
2. Detailed Renovation Budget
Itemized budgets with contractor bids show professionalism and accuracy.
3. Strong Exit Strategy
Clear plan to repay (sell, refinance) supports higher loan amounts.
4. Experience Track Record
Proven success on similar projects earns better terms.
5. Relationship with Lender
Repeat borrowers often get better ratios.
The Bottom Line
Understanding LTV and ARV empowers you to:
●Accurately estimate financing capacity
●Structure deals that work financially
●Compare lender offers effectively
●Plan your capital requirements
Master these metrics and you'll approach every deal with confidence.
