Why Loan-to-Value (LTV) Is the Key Risk Metric Investors Should Watch

When evaluating private lending opportunities, investors hear about yields, monthly income, and diversification benefits. But beneath the marketing numbers lies the metric that truly determines how safe—or risky—a loan is: Loan-to-Value (LTV).

For accredited investors in private credit, understanding LTV is essential. It’s the most direct measure of downside protection, shaping everything from default recovery rates to portfolio resilience.

What Is Loan-to-Value (LTV)?

Loan-to-Value (LTV) measures the ratio between the loan amount and the appraised value of the underlying collateral (most often real estate).

Formula:
LTV = Loan Amount ÷ Property Value × 100

Example:

• Loan Amount: $600,000
• Property Value: $1,000,000
• LTV = 60%

In this case, the borrower has $400,000 of equity in the property. That “equity cushion” is what protects investors if things go wrong.

Why LTV Is the Cornerstone of Risk Assessment

1. Built-In Margin of Safety

A conservative LTV ensures there’s real equity at stake for the borrower. The lower the LTV, the bigger the buffer before the lender’s capital is at risk.

2. Default Recovery Potential

In a foreclosure scenario, the LTV dictates how likely investors are to recover principal. At 60% LTV, the property value would have to fall by 40% before principal is impaired.

3. Borrower Incentives

Borrowers with significant equity invested are less likely to walk away. LTV aligns interests by ensuring the borrower has “skin in the game.”

4. Market Volatility Shield

Real estate values fluctuate. Lower LTV ratios give investors protection against downturns, making portfolios more resilient across cycles.

The Relationship Between LTV and Risk

• Low LTV (≤ 65%): Conservative, strong protection, high recovery rates.
• Moderate LTV (65–75%): Balanced—acceptable risk depending on asset type and borrower profile.
• High LTV (75%+): Risky—little margin for error if values decline or borrowers default.

This is why disciplined private credit funds avoid chasing yield by pushing LTVs too high. Attractive returns should never come at the cost of excessive leverage.

LTV in Practice: A Case Study

Scenario A: 60% LTV Loan

• Loan: $600,000
• Property Value: $1,000,000
• Market drops 20% → Property now worth $800,000.
• Recovery: Still full principal plus interest, since collateral covers the loan.

Scenario B: 85% LTV Loan

• Loan: $850,000
• Property Value: $1,000,000
• Market drops 20% → Property now worth $800,000.
• Recovery: Loan underwater; investors face potential loss.

The difference is clear. Conservative LTVs are the investor’s first line of defense.

LTV as Part of Broader Risk Management

While LTV is critical, it’s not the only factor. Smart investors should evaluate:

• Borrower Creditworthiness: Income, track record, and repayment ability.
• Asset Type: Residential vs. commercial vs. development properties.
• Exit Strategy: Sale, refinance, or business cash flow.
• Fund Underwriting Discipline: How consistently are conservative LTVs enforced?

Still, LTV remains the single easiest metric for quickly gauging risk exposure.

How LBC Capital Income Fund, LLC Uses LTV to Protect Investors

At LBC Capital Income Fund, LLC, our underwriting is designed with capital preservation first:

• Conservative LTVs: Typically 60–65%, ensuring a large equity cushion.
• First-Lien Position: Every loan is secured by collateral in first position.
• Hands-On Valuations: We verify property values independently, not just on paper.
• Diversified Loan Portfolio: Risk is spread across multiple properties and borrowers.

This discipline allows us to provide investors with steady income while minimizing exposure to market shocks.

What Investors Should Ask Before Investing

When evaluating a private credit fund, ask:

1. What is the fund’s average LTV?
2. What is the maximum LTV the fund will accept?
3. How are property valuations determined?
4. Does the fund maintain first-lien positions?
5. How have LTVs held up during past downturns?

If a fund can’t answer these clearly—or if it consistently originates loans at high LTVs—consider it a red flag.

The Metric That Keeps You Safe

For investors exploring private credit, LTV isn’t just another ratio—it’s the key metric that determines how well your capital is protected.

By focusing on conservative loan-to-value ratios, investors gain:

• A buffer against market volatility
• Better recovery potential in defaults
• Assurance that borrowers have equity skin in the game

At LBC Capital Income Fund, LLC, conservative LTVs are at the heart of how we deliver predictable income and capital preservation. Because when it comes to private lending, it’s not just about what you earn—it’s about what you keep safe. Reach out.