Funding a fix and flip project isn’t just about finding the right property—it’s about understanding how lenders evaluate the deal. Loan-to-cost (LTC) and loan-to-value (LTV) ratios are especially important in commercial real estate construction, where project size and risk are significant.
Both are used by lenders to determine how much risk they’re taking on and how much they’re willing to lend you. Real estate lenders use these ratios as part of their underwriting process to decide how much of a project can be financed and to set the interest rate based on perceived risk. But LTC and LTV measure different things, and knowing the difference can give you an edge when securing funding.
In this post, we’ll break down what loan-to-cost vs loan-to-value means in fix & flip financing, how to calculate each, and when one matters more than the other.
What Are Fix and Flip Loans?
Fix and flip loans are short-term real estate loans designed for investors who buy distressed or undervalued properties, make repairs or upgrades, and sell for a profit.
1.1 Typical Features:
Short loan terms (usually 6-18 months)
Higher interest rates than conventional mortgages
Interest-only payments during renovations
Down payment required as the borrower’s initial equity contribution, typically 10% to 20% of the total project cost
Typical Features:
Short loan terms (usually 12–18 months)
Higher interest rates than traditional mortgages
Interest-only payments during renovations
Lump-sum payoff when the property sells
These loans help investors cover both acquisition and renovation costs, which makes them ideal for flipping properties quickly.
What Is Loan-to-Cost (LTC)?
The loan-to-cost ratio tells a lender how much of your project’s total cost they’re financing. The cost LTC ratio is a key metric in commercial real estate and development projects, used to assess the risk and leverage of a real estate project. This includes both the purchase price of the property and renovation expenses (hard and soft costs).
LTC Formula:
LTC = (Loan Amount ÷ Total Project Cost) × 100
Example:
If your project costs $200,000 total and your loan amount is $150,000:
LTC = ($150,000 ÷ $200,000) × 100 = 75%
Why LTC Matters:
Helps keep your project within budget
Shows lenders how much of your own capital is invested
Can influence the amount they’re willing to fund
Useful for cost management and negotiating loan terms
What Is Loan-to-Value (LTV)?
The loan-to-value ratio compares your loan amount to the appraised value of the property after renovations (also known as the ARV—After Repair Value). The LTV ratio is based on the property’s fair market value or future value after completion, and is a key metric for real estate lenders.
LTV Formula:
LTV = (Loan Amount ÷ Appraised Value) × 100
Example:
If your loan is $150,000 and your ARV is $250,000:
LTV = ($150,000 ÷ $250,000) × 100 = 60%
Why LTV Matters:
Shows how much equity you have in the property after the flip
Helps lenders assess investment risk
A lower LTV typically means a safer deal for both parties
Useful for calculating your potential profit margin
Loan-to-Cost vs Loan-to-Value: Key Differences
Factor | Loan-to-Cost (LTC) | Loan-to-Value (LTV) |
|---|---|---|
What it measures | Total project costs | Property’s appraised value after repairs (ARV) |
Focus | Budgeting and cost control | Profit potential and risk |
Useful when | You need to manage upfront costs | You want to understand equity and ROI |
Who cares about it most | Lenders and real estate investors tracking project efficiency and determining required payment (such as down payment) and equity contribution | Lenders and real estate investors evaluating deal profitability, required payment, and risk based on property value |
In short:
LTC is about what you’re spending.
LTV is about what the property will be worth.
When to Use LTC Over LTV
LTC is especially valuable during the planning and budgeting phase of your flip. It gives a clear picture of how much of your total cost the lender will cover, which helps with cash flow management and upfront capital planning.
This is often the primary ratio during the loan approval process for heavy rehab or ground-up construction projects.
When to Use LTV Over LTC
LTV becomes more important when evaluating the profitability of your investment. A lower LTV means:
More equity cushion
Less risk for the lender
Better refinancing or resale flexibility
LTV is key when your focus is on returns, risk, and exit strategy.
The Role of Hard Money in Fix & Flip Financing
Many fix and flip investors use hard money loans because they’re fast, flexible, and designed for these types of deals.
Benefits of hard money for flippers:
Quick funding (often within days)
Less strict credit requirements
Customized loan terms based on the deal, not just the borrower
Ideal for properties that wouldn’t qualify for conventional loans
Because hard money lenders understand LTC and LTV deeply, knowing your numbers upfront can strengthen your position as a borrower.
The Bottom Line: Understanding LTC and LTV Makes You a Smarter Investor
Whether you’re a first-time flipper or a seasoned investor, understanding loan-to-cost vs loan-to-value can make or break your deal.
LTC keeps your costs in check and ensures proper budgeting.
LTV helps you measure equity and assess risk.
The better grasp you have on both ratios, the easier it will be to structure deals, negotiate with lenders, and maximize profit on your fix and flip project.
If you’re ready to explore flexible fix and flip financing tailored to your deal, Nvestor Funding can help structure a loan that fits your investment strategy.
