Loan to Cost on Build to Rent Projects: How Leverage Is Really Set

Loan to cost, or LTC, is the loan amount divided by everything the project costs, including land, hard costs and soft costs. It is the main leverage limit during the build phase of a build to rent deal. But it is rarely the only limit, so the real answer to "how much will they lend" is the lowest of several tests.

How LTC is calculated

Add up the full project: lot, construction, soft costs, fees and contingency. Multiply by the lender's LTC percentage. The result is the most the lender will advance against cost. The rest is your equity.

Private construction lenders typically land somewhere in the 75% to 90% LTC range, depending on experience, market and structure. Some fund a high share of the hard construction budget while holding back more on the land. RSC's New Construction program works that way: up to 90% of total cost, 100% of construction and 75% of the lot, with the loan also capped at 75% of ARV.

The other limits that can cap your loan

A build to rent loan is often tested against three numbers:

• LTC: the loan compared to total project cost.
• After-completion value: the loan compared to what the finished home should appraise for, sometimes called loan to ARV.
• Rent coverage: whether projected rent supports the permanent loan at the lender's required DSCR (debt service coverage ratio).

The lowest result wins. A cheap build in a soft rent market may hit the rent limit first. An expensive build in a strong market may hit LTC first.

Why structure matters

Leverage can differ between a standalone construction loan followed by a separate rental refinance, and a single-close loan that converts into permanent debt. Ask how each option treats the land, the build budget and the final rental loan. At RSC, build to rent is a New Construction loan followed by a separate DSCR Rental loan. The DSCR Rental loan allows up to 80% LTV on a purchase or rate/term refinance and 75% on a cash-out refinance, with a 0.75x minimum DSCR.

Example

Example (illustrative numbers only): Total project cost is $450,000. At 80% LTC, the cost test allows $360,000. The finished home should appraise at $560,000, and at 70% of value that allows $392,000. Projected rent supports a permanent loan of $375,000. The smallest figure is $360,000, so that is the likely loan, and the investor brings $90,000 plus reserves.

What this means for you

Do not plan around one leverage percentage. Run all three tests on your deal before you go under contract on the lot. The lowest number tells you how much cash you actually need, and whether the project still works.

Want to run the leverage math on your next build? Send RSC Private Lending your scenario for a term sheet in 24 hours. All loans are business-purpose and subject to underwriting.