Understanding Loan-to-Cost Before Starting a New Build

Loan-to-cost, commonly referred to as LTC, is an important metric for anyone financing a ground-up development. It measures the amount being borrowed against the total project cost. Unlike simply looking at the property's future value, LTC focuses on how much capital is required to acquire the land and complete the construction. Understanding this figure can help investors determine how much financing they can obtain and how much equity they may need to contribute.

When evaluating new construction loans, investors should calculate their total project cost before estimating the required loan amount. This should include the land purchase, construction, site work, permits, professional services, and other relevant expenses. For example, if the complete project cost is $500,000 and the proposed loan is $450,000, the LTC would be 90%. The investor would need to account for the remaining project costs through available equity or another approved source of capital.

LTC is particularly relevant when comparing real estate construction loans, because lenders may establish different maximum ratios based on their programs and the type of property being developed. InstaLend offers up to 90% LTC for eligible construction projects. Investors should also understand when their equity is expected to be used because construction funding is commonly released through draws as milestones are completed. Construction loan financing therefore requires planning beyond the initial closing amount. Knowing your LTC, required equity, and expected draw schedule before breaking ground can help you avoid cash-flow problems during construction.