The type of property and the loan to value (LTV) ratio play significant roles in determining the safety and risk of a real estate investment. Each property type: commercial, multi-family, and vacant land, presents risks and returns, and lenders take a more conservative approach when evaluating commercial and vacant land loans compared to single-family home loans. In this article we outline how safe investment-to-value ratios vary across these property types, along with the factors that influence lending decisions and desired yields.
In This Article
Commercial Loans: Higher Risk, Higher Yields
Commercial loans are generally riskier than residential loans, mainly because commercial properties depend on income from tenants to cover debt obligations. Office buildings, retail centers, and industrial properties can suffer from longer vacancy periods and tenant turnover, which increases the financial uncertainty for lenders.
Because of this increased risk, lenders are more conservative when evaluating commercial real estate loans. Loan-to-value (LTV) ratios tend to be lower, and desired yields are higher to offset the greater risk. For example, lenders typically offer LTVs between 65-75% for A+ borrowers (those with no recent late payments and FICO scores above 740) and 50-64% for those in the A category. Yields on commercial loans range from 11.00% to 14.50%, depending on the borrower’s creditworthiness and the LTV ratio.
Multi-Family: Safer Than Other Commercial Types
Multi-family housing is considered one of the safer investment options. This is because multi-family buildings, such as apartment complexes, tend to have more consistent cash flow. The risk is spread across multiple tenants, so even if a few units are vacant, the overall income stream is less likely to be significantly impacted.
For this reason, multi-family properties are generally viewed as lower risk compared to office buildings, retail spaces, or factories. The LTV ratios and desired yields are still conservative but can be slightly more favorable than those for other commercial property types. An A+ borrower can expect an LTV between 65-75% and yields around 10.00-10.50%. As creditworthiness decreases, yields increase, but the relative safety of multi-family properties helps keep these rates competitive.
Rating Late Payments (Last 12 Months) FICO Score Investment to Value (LTV) Desired Yield (%)
| Rating | Late Payments (Last 12 Months) | FICO Score | Investment to Value (LTV) | Desired Yield (%) |
| A+ | No 30-day lates | 740+ | 65-75% | 10.50% |
| 50-64% | 10.00% | |||
| A | 1 x 30-day late | 700-739 | 65-75% | 11.50% |
| 50-64% | 11.00% | |||
| A- | 2 x 30-day lates | 680-699 | 65-75% | 11.75% |
| 50-64% | 11.25% | |||
| B+ | 3 x 30-day lates | 660-679 | 60-70% | 12.00% |
| 50-59% | 11.50% | |||
| B | 4 x 30-day lates | 620-659 | 60-65% | 13.00% |
| 50-59% | 12.50% | |||
| C | 60-day lates | 580-619 | 50-60% | 14.00% |
| 40-49% | 13.50% |
Vacant Land: The Riskiest Investment
Vacant land represents a higher risk real estate investments because it generates no immediate income. Whether it’s raw, undeveloped land or a plot with future development potential, vacant land is more speculative in nature. The property could remain unused for years, and its value is subject to significant fluctuations based on market conditions, zoning changes, and development timelines.
Due to this uncertainty, lenders apply the most conservative LTV ratios to vacant land loans. LTV ratios can be as low as 50-60% for borrowers with strong credit histories (FICO scores of 580-619). The yields on vacant land loans are also higher, often exceeding 14%, to compensate for the elevated risk.
Loan-to-Value (LTV) Ratios and Desired Yields
Below is an overview of LTV ratios and desired yields based on borrower creditworthiness and late payment history for commercial, multi-family, and vacant land investments:
| Rating | Late Payments (Last 12 Months) | FICO Score | Investment to Value (LTV) | Desired Yield (%) |
|---|---|---|---|---|
| A+ | No 30-day lates | 740+ | 65-75% | 11.50% |
| 50-64% | 11.00% | |||
| A | 1 x 30-day late | 700-739 | 65-75% | 12.50% |
| 50-64% | 12.00% | |||
| A- | 2 x 30-day lates | 680-699 | 65-75% | 12.75% |
| 50-64% | 12.25% | |||
| B+ | 3 x 30-day lates | 660-679 | 60-70% | 13.00% |
| 50-59% | 12.50% | |||
| B | 4 x 30-day lates | 620-659 | 60-65% | 14.00% |
| 50-59% | 13.50% | |||
| C | 60-day lates | 580-619 | 50-60% | 15.00% |
| 40-49% | 14.50% |
Remember, the above are guides only. Never let anyone tell you how to invest your money. As a practical matter, if someone has put up 10% of their own money to buy your property it is very unlikely the loan will default, although there are exceptions.
Practical Considerations for Investors
While these ratios and yields serve as useful guides, it’s important to remember that real estate investing is highly individual. Each investor has unique financial goals and risk tolerances. Lenders often view borrowers who contribute at least 10% of their own money into a property as safer bets, reducing the likelihood of loan default. However, exceptions always exist, so it’s essential to thoroughly assess both the property and your financial standing before committing to an investment.
Conclusion
understanding the safe investment-to-value ratios for different property types is crucial for making informed investment decisions. While multi-family properties generally offer the most security, commercial properties can deliver higher returns with more risk, and vacant land, while the riskiest, may offer significant long-term potential for those willing to wait for development opportunities. Balancing these risks with appropriate LTV ratios and desired yields will help ensure your investment portfolio remains both profitable and secure.
Further Reading on Loan to Value:
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DISCLAIMER: We are not attorneys and we cannot advise you regarding your particular circumstances. You must always obtain competent legal counsel and financial advice. We believe this information to be accurate, but please check with a qualified real estate attorney in your state before making any decision based on this information.