In order to make a deal, as an investor you must understand an important concept called LTV. LTV stands for “Loan to Value”. The LTV is the amount of money owed on a property divided by its actual market value. If you found a house for $75,000 that was worth a $100,000 then the LTV would be 75%. That is easy enough, correct?
In the circle of professional RE investing, LTV has another meaning as well. It is your purchase price divided by the market value. I know that this is and can be confusing but hang in there. If you think of the amount of your acquisition cost as being a loan (whether you pay cash or get a 100% financing) then the idea makes a bit more sense.
Using the example above, let’s say you could get that $100,000 property for the same $75,000 with you taking over a $73,000 loan and paying $2,000 cash advance from your credit card to the seller. Can you see how that could be construed as you buying the property at 75% LTV? You could justifiably state that you were into that property at 75% LTV.
Another example. Assume that you were buying a $150,000 ARV (after repair value) house for $100,000. It has a $50,000 profit potential with very few repairs needed. You are in at about a 66% LTV and that would be a great deal.
If you were buying a $600,000 house for $550,000 and planning on that same $50,000 profit potential, you very well could end up in big trouble. “Why, if the profit is still $50,000?” you ask. Because, the LTV on that more expensive house is almost 92%! There is barely room to cover any real estate commissions, if you had to use a realtor. Not a good deal.
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