ARV, LTV, and LTC: The Key Metrics for a Successful Fix and Flip
As any fix and flipper could attest, embarking on a fix and flip venture can be a thrilling yet oftentimes overwhelming undertaking. It takes a lot of guts and grit to keep going and while those traits are intrinsic and can't be learned, you can equip yourself with the most important metrics to help you crunch the numbers and give yourself a solid edge.
To ensure success in fix and flip, you need more than just a strong drive to succeed and a passion for real estate investing, you also need a solid grasp of key financial metrics, as well as a pragmatic approach to the whole journey. In one of our previous articles, we talk about 7 Key Tips for Fix and Flips.
To ensure success in fix and flip, you need more than just a strong drive to succeed and a passion for real estate investing, you also need a solid grasp of key financial metrics, as well as a pragmatic approach to the whole journey. In one of our previous articles, we talk about 7 Key Tips for Fix and Flips.
In this guide, we’re going to dive deep into the metrics that drive the fix and flip strategy: ARV (After Repair Value), LTV (Loan-to-Value), and LTC (Loan-to-Cost). Together we'll break down these key fix and flip metrics, understand how they work together in the simplest of terms, calculate them, and see why they’re essential for your success.
What is ARV (After Repair Value) in Fix and Flip?
Let’s start with ARV. ARV refers to the estimated value of the property when all the repairs and upgrades are completed. It serves as a guiding light throughout the investment process, helping investors make informed decisions about which properties to purchase, how much to invest in renovations, and ultimately, how much profit they can expect to make from the project.
Importance of ARV in Fix and Flip
Here are the reasons why ARV is a crucial factor that a fix and flipper should know by heart.
- Planning Renovations: ARV helps you figure out how much renovation work is needed to hit your profit goals. It gives you an idea of what the property could become after the works are completed.
- Smart Buying Decisions: With ARV in mind, you can avoid paying too much for a property that won’t give you the returns you need.
- Nailing Financing: ARV plays a big role in calculating your Loan-to-Value (LTV) ratio, which in turn affects how much money you can borrow. So, getting ARV right is key to securing the right financing.
How to Crunch the Numbers for ARV
Here are some steps on how to calculate the ARV:
Step 1: Check the Current Value of the Property: Start by finding out how much your property is worth right now. You can do this by checking similar properties in the area (See: A Guide to Real Estate Comps) or by talking to real estate experts.
Step 2: Estimate the Renovation Value: Next, estimate how much value your renovations will add to the property. This takes some market know-how and a clear plan for your upgrades.
Step 3: Add it Up: Finally, just add the renovation value to the current property value, and voila – you’ve got your ARV.
What is LTV (Loan-to-Value) in Fix and Flip?
Now, let’s talk about LTV, which is like the litmus test for your financing game plan. LTV helps lenders understand the risk of lending money for your project by comparing the loan amount to your property’s ARV. It's essentially a ratio that compares the loan amount sought by an investor to the appraised value of the property, typically expressed as a percentage.
In simpler terms, LTV helps lenders assess the risk associated with providing a loan for a specific property. For fix and flip investors, LTV plays a crucial role in determining how much financing they can secure for their project.
Importance of LTV in Fix and Flip
LTV is a critical metric in fix and flip real estate investment as it helps investors understand their financing options, assess risk, and negotiate favorable loan terms.
- Determine the Loan Amount: LTV gives you an idea on how much financing you can secure for your fix and flip. This helps you plan your budget and know what you’re working with.
- Assess Risk: Lenders use LTV to size up the risk of lending to you. The lower your LTV, the less risky you look, which can lead to smoother sailing when it comes to getting financing.
- Playing the Terms Game: LTV can also influence the terms of your loan – think interest rates and repayment schedules. A lower LTV could mean better terms for you.
How to Crunch the Numbers for LTV:
Step 1: Determine how much loan you need: Start by figuring out how much funding you need for your project.
Step 2: Divide your loan amount by the property’s ARV to get your LTV ratio, expressed as a percentage.
To calculate LTV, simply divide the loan amount by the appraised value of the property and multiply by 100 to get the percentage. For example, if an investor wants to borrow $150,000 for a property appraised at $200,000, the LTV would be (150,000 / 200,000) * 100 = 75%.
What is LTC (Loan-to-Cost) in Fix and Flip?
Last but not least, let’s talk about LTC, the third metric a fix and flipper should be aware of to ensure your project is financially sound. LTC evaluates the risk for lenders by comparing the loan amount requested by an investor to the total costs associated with acquiring the property and completing the renovations.
To put it simply, LTC provides a measure of how much of the total project cost the loan will cover. It helps lenders assess whether the investor has the financial capacity to successfully complete the project as planned.
Importance of LTC in Fix and Flip
LTC is a critical metric in fix and flip real estate investment as it provides lenders with insight into the investor's ability to finance the project and helps prevent over-leveraging. It ensures that investors have the financial resources necessary to successfully complete the renovation and maximize their returns.
- Keeping Your Project on Track: LTC serves as an indicator of the viability of the fix and flip project. By comparing the loan amount to the total costs, lenders can determine whether the investor has enough financial resources to carry out the necessary renovations and complete the project successfully.
- Seeing the Big Picture: LTC takes into account both the acquisition costs (such as purchase price, closing costs, and any initial repairs) and the renovation costs (including materials, labor, permits, and other expenses). This comprehensive view helps lenders evaluate the overall financial health of the project and assess the associated risks.
- Avoiding Over-leverage: By comparing the loan amount to the total project costs, LTC acts as a safeguard against over-leveraging. Over-leveraging occurs when an investor borrows too much money relative to the project's costs, which can lead to financial strain and jeopardize the project's success. LTC helps ensure that investors borrow an appropriate amount based on the total project costs.
How to Calculate LTC
To calculate LTC, divide the loan amount by the total costs associated with acquiring the property and completing the renovations, and then multiply by 100 to express the result as a percentage. For example, if an investor wants to borrow $150,000 for a project with total costs of $200,000, the LTC would be (150,000 / 200,000) * 100 = 75%.
The Roles ARV, LTV, and LTC Play in Fix and Flip
Understanding how ARV, LTV, and LTC play together is key to fix and flip financial success:
- ARV Leads the Way: ARV sets the stage for your project, guiding your budget, profit goals, and financing needs.
- LTV Calls the Shots: LTV dictates how much financing you can snag, influencing your loan amount and terms.
- LTC Keeps You Grounded: LTC gives lenders confidence in your project’s financial health, ensuring you don’t bite off more than you can chew.
The key metrics in fix and flip investing— ARV, LTV, and LTC—are all crucial in making smart decisions about buying, renovating, and creating a budget for your investment properties. Understanding these numbers helps you lock in the right financing and avoid financial headaches down the road. These also help mitigate risk and arms you, the investor, with the knowledge that can help score better loan terms and keep projects on track. If you get these metrics right, you’re setting yourself up for maximum profits on your fix and flip adventures.
In a nutshell, mastering ARV, LTV, and LTC is like having a secret weapon in the fix and flip game. These numbers aren’t just fancy jargon – they’re the keys to unlocking success in the world of real estate flipping. So, crunch those numbers, make informed decisions, and get ready to flip your way to real estate success.
For your financing needs for fix and flip projects, reach out to us at Longleaf Lending. We can fund it in as little as two days!