Loan-to-Value

Loan-to-value, or LTV, is the amount borrowed against a property divided by what the property is worth. A $500,000 house with a $350,000 mortgage has an LTV of 70%. The investors' equity is the other 30%. Many fractional properties are bought with no debt at all, and their LTV is zero. Others carry a mortgage inside the special purpose vehicle, and the shares then represent the equity slice only. The listing or the offering document states which.

Debt magnifies. If the property earns more than the loan costs, the surplus goes to a smaller pool of equity, so the cash-on-cash return rises. If the property's value climbs 10%, on a 70% LTV deal the equity has climbed by a third. The reverse is just as true. A 10% fall in value wipes out a third of the equity. A rise in interest rates when the loan resets can turn a positive cash flow negative. And a lender has rights an investor does not: if payments are missed, the lender can force a sale at whatever the market will pay, and the equity is paid last. The risk is not the debt itself. It is debt that is large relative to the income the property earns. A property whose NOI covers its loan payments 1.25 times or more has room for a bad year. One that barely covers them does not.

Look for the LTV and, next to it, the interest rate, whether it is fixed and when the loan matures. A fixed-rate loan that outlasts the hold period is a known cost. A floating rate or a loan that matures mid-hold is a cost that could change. An all-cash property is simpler and safer but earns a lower return on the same rent. Which is better depends on how much of the projected return is coming from leverage rather than from the property, and whether you would still be happy with the deal if the leverage worked against you.