LTC vs. All In: What's the difference?

Buying, renovating, renting, and selling properties are just the beginning when it comes to building a profitable real estate portfolio. You'll need the right strategy to scale your real estate projects and build a revenue engine that reliably delivers profits on your investments in the short and long term.

To scale your projects and establish a reliable revenue engine, you need the right strategy. Among the various financial options available, two common approaches are LTC and All In.

Let's explore the difference between these strategies and how to determine which one suits your needs.

LTC vs. All In: What’s the difference?

Loan to cost (LTC) is a ratio lenders use to evaluate the risk of a real estate investment project. It compares the loan amount to the project's total cost, including the purchase price and any expenses related to the property.

The LTC is calculated by dividing the loan amount by the total cost of the project. The math looks like this:

LTC = Loan Amount / Total Cost of Project

So if you need a $1 million loan to finance the purchase and renovation of a property at a $1.5 million total cost, your LTC would be:

LTC = $1,000,000 / $1,500,000 = 0.67 or 67%

This means that your lender will write a loan to cover 67% of the project's total cost. The difference is typically made up for using your equity.

A higher LTC means that the borrower contributes less equity, making the loan more risky. With a higher LTC, lenders may require a higher interest rate, more collateral, or more stringent loan terms.

A lower LTC means that the borrower contributes more equity, which may decrease the loan risk and improve the terms through lower interest rates or longer repayment terms.

The All-In approach

When you hear the term "All-In" in real estate lending, it refers to the total cost of a real estate investment project, including all expenses related to acquiring, developing, and overall financing the property.

Here are a few examples of the typical expenses included in an all-in cost calculation:

• Purchase price: This is the contract price paid to acquire the property.
• Closing costs: These include the expenses related to the property's ownership transfer, such as title insurance, recording fees, and legal fees.
• Renovation costs: Your renovation costs include any expenses for repairs, improvements, or upgrades made to the property, like painting, flooring, HVAC upgrades, or plumbing and wiring.
• Financing costs: This includes expenses related to obtaining your financing for the project, such as loan origination fees and interest payments.
• Holding costs: Holding costs increase the longer you keep a property. For instance, these are expenses related to the ongoing maintenance and management of the property, such as property taxes, insurance, utilities, and property management fees. If your plan is to fix and flip the property, you hope to work as quickly as possible to decrease the holding costs.

To calculate the all-in cost of a real estate investment project, you would add up all of the expenses included in every stage of development of the property.

All-in cost calculations can vary and fluctuate depending on the scope of the project. In addition to acquisition, financing, and development costs, you may also consider adding administrative costs related to marketing and leasing or selling the property.

Is LTC or All In the right strategy for you?

The main difference between LTC and All In boils down to the math.

While the loan-to-cost ratio compares the loan amount to a subset of the total project cost (the cost directly related to the property purchase and development), all-in is a more comprehensive calculation that accounts for all the costs associated with a real estate investment project.

How will you know which is right for you? Consider these factors to help you decide how much financing you’ll need and which investment strategy makes the most sense.

Project scope

LTC may make sense if you’re acquiring a recently upgraded or renovated property that needs minor work. Suppose the project includes a bunch of additional costs like renovation, development, and other expenses beyond the acquisition cost. In that case, all-in may be the better approach to determine the best type of financing.

Financing

LTC may be the best way to determine how much equity you'll need if you plan to utilize income from other properties to finance the bulk of the project. However, you may plan to use a combination of equity and financing through real estate loans. If so, all-in may be more useful in determining the total amount of financing you’ll need.

Risk tolerance

A higher LTC ratio may mean more leverage and potentially greater returns but also greater risk. On the other hand, a more conservative approach with a lower LTC ratio may offer greater security but lower returns.

Whether you’re interested in fixing and flipping houses, developing a portfolio of rental properties, or everything in between, be sure that you are considering all of your investment strategies and financing options to help you meet your financial goals.