Basic LTV question

7 Replies

If I want to get a 75% LTV on a 20 unit apartment building, how does the bank determine the "value"? I mean, most buildings are priced according to their income potential which is usually higher than the appraised value, so do banks look at the income to determine value?

Beekrock,

Commercial appraisers use 3 different methods to evaluate the property. The income method considers the income from the property as you suggested. The comparable sales method looks at recent sales in the area. Finally, they use a replacement cost method. So, yes, they will be considering the income.

Mike

Most appraisers will lean heavily toward the income approach for a 20-unit apartment building and, as mentioned above, the lender will definitely apply the LTV to the lesser of the appraisal or the purchase price.

FYI, portfolio lenders (those that hold their paper in house) may go higher than 75% on an apartment property.

In commercial real estate, value is really cash flow focused, which comes down to NOI (Net Operating Income). NOI determines the appraised value, so it goes hand in hand. If you read the appraisal, on multi unit commercial real estate, you will see how much NOI is the focus.

You can read up on NOI...Gross Income Potential, less expected vacancy, less all expenses, etc.

Take care, Stuart

Originally posted by "stuart888":
In commercial real estate, value is really cash flow focused, which comes down to NOI (Net Operating Income). NOI determines the appraised value, so it goes hand in hand. If you read the appraisal, on multi unit commercial real estate, you will see how much NOI is the focus.

You can read up on NOI...Gross Income Potential, less expected vacancy, less all expenses, etc.

Take care, Stuart

stuart888 is absolutely right -- and if you do want to read up on this, go to our web site (realdata.com), click on the "Learn" tab and then click "read all of our real estate articles" Near the bottom of the list you'll find "Understanding Net Operating Income" and "How to Estimate Resale Value - Using "Cap" Rates."

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