What Is Loan-to-Value (LTV) in Real Estate?
Introduction
If you're learning real estate finance, one of the first terms you'll come across is Loan-to-Value, or LTV. It's a key concept in property underwriting, debt sizing, and risk management. Whether you're modeling a deal, preparing for a real estate interview, or simply trying to understand how real estate loans work, knowing how LTV is calculated — and why it matters — is essential.
Loan-to-Value (LTV) Definition
Loan-to-Value (LTV) is a ratio that compares the size of a loan to the value of the property being financed. It shows what percentage of the property's value is being funded with borrowed money. This simple calculation is used by lenders to assess risk and determine how much they are willing to lend on a deal.
The formula for LTV is:
LTV = Loan Amount ÷ Property Value
For example, if a lender provides a $7,000,000 loan for a property valued at $10,000,000, the LTV is:
$7,000,000 ÷ $10,000,000 = 70%
This means the loan covers 70% of the property's value, and the remaining 30% must be funded with equity, or $3,000,000.
Why LTV Matters in Real Estate Finance
Loan-to-Value is one of the first metrics a lender looks at when evaluating a real estate deal. It serves as a quick way to measure how much equity the borrower is putting into the transaction and how much protection the lender has if the property’s value drops.
A lower LTV generally means a safer deal for the lender because the borrower has more “skin in the game.” If something goes wrong — such as falling rents or rising expenses — there’s a greater buffer before the lender takes a loss. On the other hand, a higher LTV means more leverage, which can increase risk.
LTV isn’t just a lender tool — it also impacts how investors structure deals, underwrite risk, and target returns.
How LTV Affects Leverage and Returns
One of the key reasons LTV is so important in real estate is because it directly affects leverage, which in turn impacts investment returns.
The more debt (higher LTV) you use to finance a property, the less equity you need to invest. That means a greater share of the income and appreciation goes to the equity investors. This can boost return metrics like cash-on-cash return and IRR — especially if the asset performs well.
However, leverage is a double-edged sword. While it can magnify upside, it also amplifies downside risk. If property income falls short or cap rates rise, a highly leveraged deal could struggle to meet debt payments — or result in negative returns for equity holders. Lenders know this, which is why they carefully monitor LTV levels when offering financing.
How LTV Impacts Loan Sizing
LTV is one of the primary constraints lenders use when sizing a loan. If a property is valued at $12,000,000 and the lender is comfortable with a 70% LTV, then the maximum loan would be:
$12,000,000 × 70% = $8,400,000
In this case, the borrower would need to bring $3,600,000 in equity to complete the acquisition.
Even if a deal looks good on paper, if the LTV exceeds the lender’s threshold, they may reduce the loan amount, adjust the terms, or require additional collateral. This is why LTV is a central part of real estate underwriting — for both borrowers and lenders.
Key Takeaways
Loan-to-Value (LTV) is one of the most foundational concepts in real estate finance. It tells you what percentage of a deal is financed with debt, impacts your required equity investment, and plays a key role in determining risk and return.
Whether you're structuring your first deal, modeling in Excel, or preparing for an interview, understanding how LTV works — and how it fits into the bigger picture of real estate finance — will give you a serious edge.
Need help walking through how LTV fits into a real estate financial model? Book a 1-on-1 session and I’ll show you step-by-step how to analyze leverage, size loans, and build it into your pro forma.