Key Debt Management Metrics Guide for Real Estate Owners

Each lender may have a slightly different thresholds for each of these metrics and based on the project/asset associated risks.

Loan-to-Value Ratio (LTV) Definition: The Loan-to-Value Ratio (LTV) shows the size of a loan compared to the value of the associated property. Lenders and other financial institutions use loan-to-value (LTV) to assess risk. The higher the LTV, the more risk involved with the loan. While the required LTV ratio can vary between lenders and by types of loans, generally the accepted LTV ratio is between 65-80%.

How to Interpret the Numbers:

LTV > 100% LTV = 81% - 99% LTV < 80%

If your LTV is greater than 100%, Generally, LTV’s greater than An LTV of less than 80%, is the think underwater. The value of 80% or less than 100% are mostly widely accepted ratio. You your property is worth less than considered higher risk and are likely to receive the best loan your loan. If you sell the asset, therefore you will pay a higher terms. you will need to write a check to interest rate. In the residential the lender for the shortfall. market, there are mortgage programs that serve this market.

Debt Coverage Ratio (DCR) Definition: Another name for this ratio is the debt service coverage ratio (DSCR). This formula is calculated by taking the annual NOI and dividing it by the total debt service (loan amount). The DCR is a measurement for the ability to repay debt obligations. How to Interpret the Numbers:

DCR < 1 DCR = 1 DCR >1

A DCR of less than 1 expresses A DCR that is equal to 1 means A DCR that is greater than 1 means negative cash flow or not enough yours real estate income equals that your real estate is generating cash to cover the loan payment. your debt. This is a vulnerable enough income to cover your debts. spot. Most lenders require a DCR between 1.20 and 1.40.

1 Net Operating Income (NOI) Definition: The NOI calculation is used to understand the profitability of an income producing real estate asset.

NOI includes the income from the asset, less expenses for operating the asset. The NOI calculation does not include capital expenditures, debt financing, or taxes.

Loan-to-Cost (LTC)

Definition: The LTC ratio is most frequently used by lenders when the are assessing a project. They are evaluating the cost of the project compared against the amount borrowed.

How to Interpret the Numbers: Most lenders want an borrower to have some skin in the game and will only lend 70 - 80% of the project.

Capitalization Rate (Cap Rate)

Definition: The capitalization rate, or cap rate, is a method to quickly estimate the profitability of an asset based on the net income the property is expected to generate over a year. This metric should not be used in isolation.

The values in this formula can be rearranged to determine other values as well.

How to Interpret the Numbers: Generally, a higher cap rate means more risk and a lower cap rate means less risk.