20. What is loan-to-value?
You may not have invested in real estate crowdlending yet, but you probably know what loan-to-value is. Even if you are not aware of it…
Loan-to-value (LTV) is nothing more than an indicator, a measure of the risk of a real estate investment. LTV is the ratio between the loan used to buy a property and the value of the property itself. For example, if you buy a property for 100,000 euros and use a mortgage loan of 80,000 euros, the LTV would be 80%.
So now you know. When someone wants to buy a house and takes out a mortgage, loan-to-value comes into play. Normally, buyers must have one-third of the value of the house. Why? Because the bank will usually only finance 80% of the sales price, so the buyer must have at least 20%. The rest, around 10-15%, has to do with the buyer’s expenses.
Following the example, a typical mortgage loan will be 80% of the value of the house. The LTV will be just 80%. It is easy to think that the risk of the operation -for the bank, which is the one providing the loan- will be lower the lower the LTV. If the buyer puts more money on the table, he will need less money from the bank and, therefore, will ask for a smaller mortgage, with a lower LTV.
Loan-to-value and real estate crowdlending
As we have explained in the real estate crowdlending projects, it is essential to have a good level of guarantees. When Urbanitae provides a loan to the developer, we look closely at the developer’s ability to repay it. And guarantees are provided so that, in the event that the developer is unable to pay, he will respond with them. Thus, investors are not left unprotected.
There is no single formula for calculating the LTV from the value of the guarantees, since the LTV is calculated by dividing the loan by the value of the property, and the guarantees do not always correspond to the total value of the property.
However, it is possible to estimate the LTV from the value of the collateral and the value of the property. To do this, add the value of the collateral to the value of the property and then divide the loan by this total value. For example, if the value of the property is 200,000 euros and additional collateral worth 50,000 euros is provided, the total value would be 250,000 euros. If the loan is €150,000, the LTV would be 60% ((150,000 / 250,000) x 100).
The case of the Proyecto Cívitas, the largest real estate crowdlending project financed in Spain, is somewhat different. In this case, Urbanitae investors came together to grant a €5 million loan to Cívitas. This loan is backed by four Cívitas developments: here are the guarantees. Together, these four developments will generate a free cash flow of €12.2 million.
Thus, the guarantees (€12.2 million) account for more than 240% of the loan value. In the Cívitas project, the loan-to-value was calculated by dividing the loan by this value of the guarantees: the result, an LTV of 41% ((5,000,000 / 12,200,000) x 100). A low percentage that, judging by the reception of the project, also convinced Urbanitae‘s investors. What about you? Do you dare to invest?