When searching for private financing, you’ll find a variety of leverage structures offered for rehab or ground-up construction projects. The leverage structure explains the maximum percentage the lender will fund for the purchase and for the rehab or construction costs, plus the maximum loan-to-value based on the value of the property after the project is completed. Leverage is one of the most important pieces of information that real estate investors and brokers need to know when searching for private lending companies (aka hard money lenders).
Leverage Structure Terminology
To communicate their leverage structure, lenders will use 3 key percentage numbers:
- LTP: Loan-to-purchase price
- LTC: Loan-to-cost
- LTARV: Loan-to-after-repair value
For ground-up construction, some lenders prefer the term loan-to-completed value (LTCV), or loan-to-finished value, instead of after-repair value.
The loan-to-purchase price (LTP) is the maximum percentage a lender will fund for the purchase of the property. To determine how much cash you need to put down for the purchase, simply subtract the maximum LTP from 100%.
Loan-to-cost (LTC) is the maximum percentage of the total rehab or construction budget that a lender will fund. For residential rehab projects, most private lenders fund 100% of the budget, but investors typically have to pay for the first phase of the project out of pocket and get reimbursed after the lender has completed an inspection.
The loan-to-after-repair value (LTARV) is the maximum percentage that the loan amount can be, based upon the project’s after-repair value or completed value. Most private lenders max out at 70%, but some are more conservative with a max of 65% and some can go up to 75%.
Leverage Numbers
When communicating the maximum leverage percentages, most lenders don’t use acronyms or words. For example, if a lender is willing to funding 85% of the purchase and 100% of the rehab costs, this will be communicated as 85/100. If you include the after-repair value, it could be 85/100/70.
There are lots of different ways that lenders structure rehab and construction loans. The most common for rehab projects are
- 80/100/70
- 85/100/70
- 90/100/70
A very small percentage of lenders do 100/100/70, and 100% financing is typically limited to local lenders that lend in one state or metro area. I know one lender in Southern California that funds 100% of the purchase price but 0% of the rehab budget. Some lenders have a max leverage based on the total project costs, which includes both the purchase and the rehab budget. In these cases, the maximum leverage is stated simply as one percentage instead of two: 85% LTC versus 85/85.
With ground-up construction, the maximum leverage percentages are much more conservative, especially with land acquisition. Most lenders structure construction loans at 50/100/65. Some do 50/80/70. Some lenders are more aggressive with land acquisition at 65/100/70, but the deal would have to be shovel-ready with building approvals.
Maximum Loan-to-Value
Regardless of how a lender structures their maximum loan-to-purchase price and loan-to-project costs, the majority of private lenders are targeting a loan-to-after-repair value of 70% or less. 70% tends to be the magic number in private lending. Even if your exit strategy is to refinance with a DSCR long-term rental loan and you’re getting quotes of 75% or perhaps 80% LTV for that takeout loan, private lenders financing the rehab or construction will remain conservative with the 70% loan-to-after-repair value.
If you find a lender advertising a 75% maximum loan-to-after-repair-value, that’s likely not offered to everyone. You typically need to be a top tier borrower in order to achieve that percentage. Top Tier typically means you have strong financials, a high credit score, lots of assets, and lots of experience with rehab or construction projects. On the flip side, if you have weak financials, an average or poor credit score, and not enough experience, many lenders will reduce the maximum loan-to-after-repair value to 65%.
How to Find Out Leverage Structures for Private Lenders
When using PrivateLenderLink.com to search for lenders, it’s very easy to find out the leverage structures for each lender. There are two options for using our platform.
Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, including leverage structures, rates, fees and much more. Make contact with each out directly by email, phone call, or visit their websites. First select a loan type, then enter the state where the property is located.
Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.
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