How to Calculate Leverage for a Real Estate Investment

When a prospective borrower contacts a lender to get financing for their next investment property, they may have questions regarding how to calculate loan-to-value or leverage.

A lender will typically go over the loan scenario, client’s experience level, total financial picture and future property value and make a determination, first, if it fits within their lending guidelines and then, what leverage they would receive. At RCN Capital, when we are determining the leverage an investor will receive for a purchase, the value we use is the lesser of the purchase price or the appraised value of the property.

So, for example, if an investor is purchasing a property to hold as a long-term rental for $200k but it appraises for $250k, RCN Capital would calculate our loan amount based on 80%, the highest leverage we offer for our long-term rental program, of $200k, the purchase price, which would be $160k. This is standard for every borrower and we expect that our clients have some skin in the game to reduce our risk on the loan.

Continue reading to learn more on how to calculate leverage for a real estate investment.

Flexibility is Critical

The leverage that investors can receive from many lenders will vary dependent on the type of loan they are looking for. Many lenders, like RCN Capital, will offer additional leverage for short-term loans that investors are looking to utilize for fix & flip projects as these loans will often provide monies for both the purchase of the property as well as the renovation costs.

For example, let’s say an investor has a property that they’re looking to purchase & rehab in Daytona, Florida. They purchase the property at $150k and need about $75k to fix it up and cater to today’s buyer who wants an open concept floor plan including a new kitchen, baths, and hardwood flooring.

The property has an estimated after-repair value of $300k. The amount needed to renovate the property is $50k. RCN Capital can lend up to 90% of the purchase price or $135,000 at the closing. RCN can then lend finance an additional $50k for the renovations with our fix & flip loan program.

In RCN’s case, we will lend on the lesser of the 90% of purchase price + 100% renovations OR up to 75% of the ARV. In this case, the purchase price + renovations was the lesser amount. This property will need to appraise at a minimum of $270k in order for this loan to work for us.

Good news, though, if the appraisal does come in for less, it doesn’t necessarily mean the lender can’t do the loan. It just means that they will often have to tweak the numbers and lessen the amount they’ll lend on the purchase price.

Consider the Appraisal Impact

For many lenders, while the appraisal does directly impact the loan amount, lenders like RCN Capital can work with you on this. Many potential new borrowers ask how the ARV is truly determined. When submitting a loan request for a flip, the investor will provide a detailed scope of work and associated costs based on the degree of the finishes for their project. Since an investor will need to have a full appraisal completed on a property as part of their loan request, the appraiser will be provided with this scope of work prior to them going out to appraise the property. Then when the lender receives the appraiser’s analysis, it will have twokey-pieces of information: the current market value and the after-repair value or ARV based on the information the appraiser received.

Remember: It's a Team Effort

At RCN Capital, we have an in-house appraiser that confirms the information on these reports every day looking for potential inconsistencies. As long as everything looks good, we will base the final leverage on this appraisal report. The underwriter, loan officer, and our approval committee look at the purchase price, property value and set the loan amount based on our lending guidelines..

In today’s competitive investing landscape, having options and increasing your leverage is important and RCN Capital is dedicated to providing real solutions tailored to your real estate investing needs.

If you have any questions concerning how to calculate leverage for your next real estate investment, contact RCN Capital today to learn more.