What LTV do you actually sleep well at night with?

Question

Simple question, but I think the answers will vary a lot based on experience and cash flow situation.

On a single-family rental with a DSCR loan, what LTV percentage do you personally consider “low risk”? Not zero risk, because leverage always carries some, but the point where you feel genuinely comfortable.

75% LTV is the standard, and it works for a lot of people. But at 65% or even 50%, your cushion on DSCR tightens less quickly if rents soften or rates adjust. Drop down to 40% and you’ve got real flexibility, though obviously your capital efficiency takes a hit.

Everyone’s threshold is different depending on reserves, cash flow, market, and how many deals you’ve been through. I’m curious where yours lands.

Mine is 60% as it allows for good cash flow, reserve buildup and always feel I  would be in control as if it got hairy could sell as well and not have to worry about covering the bank debt.

Drop your number below and, if you want, tell us why. Would love to see where the community actually sits on this.

Henry Clark · Answer

OP several variations.  We have 3 types of REI.   Self storage, Country Subdivision lots, Teak plantation.

Self storage is traditionally 75% commercial loan.  We prefer SBA 90%.   The reason we are comfortable with either and prefer the 90%.  When we develop a location we always build to where 65% occupancy is our break even covering all expenses and PI.  The second phase we only need 35% occupancy to cover.  On top of that we are very good at our market analysis so Occupancy issues are not a concern.  On top of that we always ask for interest only until we hit 65% occupancy or 18 months whichever comes first.  So the LTV PI implication doesn’t hit us right off the bat.

Country Subdivision we do 100% ourselves.  To risky with even 75% LTV leverage.  This isn’t smart REI investing but we sleep easy.  If we financed the bank would be at 65% LTV which would be to high risk for me.

Teak plantation is 100% cash deals.  Overseas the best we could do is 50% LTV with a 10 year term and 13% interest.  To risky.  Plus at 13% the bank gets most of the profit.

If I was in the right market, just starting out. I would take a USDA loan at 100% LTV just to get started with my own housing if I qualified.

@Ale Ayestarán.   Would love to hear OP on several topics and podcasts on BP.

Chris Seveney · Answer

@Henry Clark - thanks for reply and comments.

interesting on self storage - i've never invested in self storage and I was curious just for informational purposes, and Financing looked on those. Thanks for info

John Morgan · Answer

70% with me when I first buy a rental.

Drew Sygit · Answer

Agree with @Stuart Udis.

I'm ok with more leverage on Class A than Class B or C.

Class A typically rents faster and has more stable tenants.

On the other hand, in a black swan event, I'd rather sacrifice the Class C properties to keep the Class A's & B's.

Don't foresee a repeat of the Great Recession though - but, who ever sees a black swan event coming?

Stuart Udis · Answer

This is highly property specific.

One thing I think gets overlooked is that lower-cost real estate is often disproportionately impacted by CapEx and operating expenses because many costs are fixed or semi-fixed regardless of property value. As a result, there is often an inverse relationship between property value and the amount of leverage that can be safely supported.

This runs counter to how many investors think about risk. A property is not necessarily less risky simply because it is less expensive. For example, 80% leverage on a $100,000 single-family rental in a C-class neighborhood is not the same as 80% leverage on a single-family rental in an A-class neighborhood. A new roof, a water service line replacement, and a prolonged vacancy can quickly put the C-class property underwater. Those same costs may represent only a small percentage of the value of the A-class property and are often more easily absorbed.

Liquidity and reserves are equally important considerations. You need sufficient cash reserves to cover debt service during prolonged vacancies and unexpected repairs. Assuming adequate reserves are in place, an 80% LTV loan on a property built five years ago with a strong rental history and no major systems nearing replacement may be considerably lower risk than a 60% LTV loan on an older property with deferred maintenance, major systems nearing the end of their useful lives, and a history of inconsistent occupancy.

Property type matters as well.  Commercial vacancies are often more difficult and time-consuming to re-lease than residential vacancies, so lower leverage provides additional cushion during periods of vacancy and lease-up. Lenders know this and often underwrite at lower LTV's for commercial and mixed-use real estate.For those reasons, leverage should be evaluated in the context of multiple factors, including liquidity, property condition, operating history, asset type, and capital expenditure exposure, rather than focusing solely on the LTV percentage.

What LTV do you actually sleep well at night with?

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