Portfolio Loan to Value ratio

[23994]

Hi,

Can you please share what the appropriate loan to value ratio is for your portfolio? I know for mortgage, normally bank has the decision e.g. no more than 80%, or 65% re-finance ratio, I am just wondering for each of us ,as we build up our portfolio, say we may have 5, or 10, or 20 investment properties, what is the healthy and safe ratio we should consider to be able to go through the up and down markets or as long as we can get the mortgage from bank, then we should be ok?

Thanks,

Sue

 

[Thomas Beyer]

Most commercial lender look for a DCR of 1.25 to 1.3, or higher in smaller more risky towns, say 1.5.

This means cash flow from operations needs to cover the loan by a margins of 25 to 30%. So, if your mortgage payment is $10,000 a month then the asset needs to show an NOI of $12,500 to $13,000 a month or over $15,000 in smaller more risk and usually more vacancy prone markets !

As such LTV is less relevant as debt coverage ratio (DCR).

By law banks cannot lend more than 80% LTV without insurance.

In non-rental buildings without cash-flow LTV is used too, as there is no DCR. However, then they use income to debt ratios (i.e. a modified DCR based on personal, nit asset income) like 40% of income over total debt payments (i.e. including credit cars or car loans) or 33% for house payments incl. taxes and insurance.

 

[Matt Crowley]

^ Yes

Mortgage payments are not made against LTV they are made against cash flow. LTV is something to look at during refinancing time as it will show your upper limit. DCR should drive your decision making.

The most experienced investors typically use 30% down. Professional developer typically purchase in this range as well. It should be a big concern when someone with far less experience suggests using far higher leverage. Someone with a lot less experience is not going to achieve higher rents so what they typically have is a lower performing asset with a lot more leverage and a lot more risk.