The Importance of Loan-to-Value (LTV) Ratios in Securing Trust Deed Investments

In determining how a trust deed investment stacks up, there’s one important number to which the investor must pay attention: the Loan-to-Value Ratio, or LTV. Whether new to trust deeds or an experienced investor that wants to refine their strategy, the LTV ratio is extremely important. This single metric can make the difference between a secure investment and unnecessary risk.

At LBC Capital Income Fund, LLC Income Fund, we always put a great deal of importance on securing favorable LTV ratios in order to instill confidence in investors’ returns. Let’s consider why LTV is of such importance, how it affects trust deed investments, and how LBC Capital Income Fund, LLC makes sure that every deal is as secure as possible.

What is Loan-to-Value (LTV) Ratio?

The Loan-to-Value ratio is simply a formula used to compare the loan amount against the appraised value of the property that secures the loan. It is expressed as a percentage and serves to measure the level of risk involved in a loan.

For instance, if the borrower requires a $500,000 loan on a property worth $1,000,000, the LTV ratio would be 50%.

Formula:
Loan Amount ÷ Property Value × 100 = LTV

A lower LTV is generally considered a safer investment because there is more equity to cushion the lender should the borrower default. On the other hand, a high LTV implies that the borrower has less equity in the property, increasing the level of risk for the lender.

Why LTV Matters in Trust Deed Investments

When you invest in trust deeds, your main security is the property itself. The LTV ratio defines how much equity is held within that property and, subsequently, how secure the investment is. Here’s why it’s important:

1. Minimized Risk
   The low LTV ratios avail a wide safety margin. If the borrower happens to default, the lender is more likely to recover their money through a foreclosure sale. For example, a 50% LTV level means the value of the house would have to decline by 50% before the lender is in jeopardy of losing any money—a truly unlikely occurrence.
2. Better Market Protection
   Real estate markets go up and down, but properties with low LTV loans are less affected by such downturns. For instance, compared to an 85% LTV loan, a 70% LTV loan would be much more resilient in the case of a market correction. For trust deed investors looking for consistent returns with no excessive exposure to market volatility, this makes the lower LTV ratios all the more worthwhile.
3. Better Borrower Commitment
   Borrowers with more equity in their properties-and thus lower LTV ratios-are less likely to default. Their financial stake in the property motivates them to stay current on their payments and thus less likely to face foreclosure proceedings.

What’s Considered a “Good” LTV Ratio?

For trust deed investments, an LTV below 70% is generally considered ideal. At LBC Capital Income Fund, LLC Income Fund, we work to maintain an average LTV of 60%-65%. We find that this allows us to strike a solid balance between attractive returns and a high degree of security for our investors.

Why Not Go Higher?
While the lenders may allow loans with LTV ratios above 80% to attract more borrowers, exponential risk develops for investors. Higher LTVs means thinner equity cushions, leaving smaller rooms for error should there be a devaluation of the property or a default.

LTV Ratios vs. ROI: The Right Balance

One widely spread misconception among investors is that a low LTV can result in lower returns. In fact, the right balance in between LTV and ROI can contribute to both security and great performance. This is why:

• The higher LTV, the higher risk. Indeed, higher LTV loans might offer a bit higher interest rates, but the risk of default also does not stay behind.
• Lower LTV, Sustainable Returns: Loans with lower LTV ratios may have marginally lower interest rates but come with significantly reduced risks. Investors still enjoy attractive returns without sacrificing security.
  
  At LBC Capital Income Fund, LLC, our investors benefit from an annual ROI of 8%-10%, supported by carefully selected trust deeds with favorable LTV ratios. This balance ensures steady, predictable cash flow while protecting investor capital.

How LBC Capital Income Fund, LLC Analyzes LTV Ratios

We know due diligence is the bedrock of secure investment, and at LBC Capital Income Fund, LLC, each loan that comes into our radar undergoes strict scrutiny, of which LTV stands at the top of the list. Here’s how we address it:

1. Full Property Valuation
   We partner with reliable appraisers who can accurately ascertain the current market value of every given property. Accurate valuations are of prime importance in correctly working out realistic LTV ratios.
2. Market Trend Analysis
   Our company team follows real estate trends in local markets. We, for example, give more focus to properties that have stable or appreciating property values to maintain desirable LTV ratios during the whole tenor of the loan.
3. Borrower Financials
   Apart from the property itself, a review of the borrower’s financial capability, past payment history, and their intended use of proceeds of the loan is considered. Generally, borrowers with strong credit and business plans match up with low-risk LTVs.
4. Diversification
   We further diversify our trust deed investments across property types and geographic locations, making sure that no single loan dominates our portfolio. This further reduces the risk and stabilizes returns.

Real-World Example: How LTV Can Protect Investors

Consider this example:

A borrower requests a $600,000 loan to rehabilitate a property that appraises for $1,000,000.

The LTV would thus be 60%, with $400,000 in equity serving as a cushion.
Now, let’s say the real estate market has a 20% correction, so the property value declines to $800,000. Still, the $600,000 loan is well-covered by the equity of the property. This is where trust deeds can provide an attractive avenue for conservative investors looking to minimize their risk.

The LBC Capital Income Fund, LLC Advantage

LBC Capital Income Fund, LLC Income Fund is a specialist in trust deed investment. To further protect our investors, we concentrate on loans with low LTVs. Here’s what sets us apart:

– Scrutinized Loans: Our seasoned team handpicks only the best loans out of the available pool, with heavy equity backing for each, to ensure investments meet our intense criteria.
– Diversified Portfolio: Residential to commercial, our portfolio is diversified across different sectors to minimize risks pertaining to specific markets.
– Predictable Returns: With an average ROI of 8%-10%, our investors enjoy consistent cash flow supported by secure, low-LTV investments.

Why LTV Ratios Should Be on Your Radar

Whether you’re a seasoned investor or new to trust deeds, LTV ratios should always play a central role in your decision-making process. They offer insight into the security of your investment and provide a tangible measure of risk.

At LBC Capital Income Fund, LLC, we make the protection of the investor’s security effortless, without any compromise in net returns. Our full commitment is to maintaining low LTV ratios so that your portfolio will be resilient even during times of economic uncertainty.

A Key Metric for Smarter Investing
The Loan-to-Value ratio isn’t just any other number; it’s a vital tool for measuring risk, ensuring stability, and securing strong returns. For accredited investors looking to diversify their portfolio with real estate-backed loans, there is a need to understand LTV ratios.

Are you ready to explore secure, high-yield opportunities with LBC Capital Income Fund, LLC? We would love to discuss how trust deed investments with favorable LTV ratios can help you achieve your financial goals. Contact us today to learn more.