Loan-to-value (LTV) is a metric you’ll see associated with PeerStreet’s investments and, more generally, real estate debt. It’s also a term with multiple meanings. For example, in tech, LTV often means “lifetime value.” Given that it can denote different things depending on context, and because we are a company that intersects real estate finance and technology, we thought it best to explain our specific use of LTV.
In real estate, LTV is the basic calculation of the loan amount divided by the total value of the property. It helps you figure out how much the borrower has invested in the deal and how the capital stack is structured. The higher the LTV, the higher the perceived risk of the investment. The numerator (loan amount) is the easy part of this equation. Determining the property value is really what’s key here.
How does PeerStreet derive the value of collateral? We order a broker’s price opinion (BPO) or third-party appraisal as part of our underwriting process to determine value. Typically, the loans we put up for investment do not exceed 75% LTV, meaning that there is usually a minimum of 25% cushion between the PeerStreet loan amount and the value of the property.
When evaluating real estate debt investments, you may also hear that LTV can be based on either an “as is” or “ARV” basis. There’s an important distinction between the two, and knowing the difference will make you that much better informed about investments. we report LTV on an “as is” basis or we calculate an effective LTV when there is a construction component.
Calculating LTV on an “as is” basis means using the current value of the property in its current condition, without taking future construction or repairs into account. For example, if an appraisal comes back with a current property value of $1 million and the borrower took out a $500,000 loan, the “as is” LTV would be 50%. On the other hand, after repair value (ARV) means taking an estimated value of what the property value is expected to be after repairs and renovations. In that case, if the current appraised value is $1 million and the borrower took out a $500,000 loan but it’s believed that the property value will increase to $1.5 million after renovations, then the LTV, based on the after repair value, would be approximately 33%.
Determining risk based on ARV metrics is tricky because it is hard to accurately determine whether a particular property enhancement or repair will boost its value as much as the stated value represents. In addition, even if the renovation went as expected, there are several other macroeconomic factors that could potentially impact the future value of the property.
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We feel that it is most important to measure the amount of money that the borrower has outstanding today against the value of that property in today’s market. Or, we advocate underwriting loans at a conservative loan-to-ARV and making the distinctions clear to investors.
There are a number of loan characteristics to evaluate when finding the best investment options and we try to make the process as transparent and as easy to understand for our investors as possible.
If you still have questions about PeerStreet’s approach to LTV, we would be happy to help. Email firstname.lastname@example.org or give us a call at (844) 733-7787.
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