The loan-to-value ratio is one of the more simple ratios to calculate:
Loan Amount / Market Value = Loan-to-Value
The loan amount that a property can support is based on a number of factors, most notably net operating income, and debt coverage ratio. The market value for a property, as explained above, is the lesser of appraised value or purchase price.
Lenders use the loan-to-value ratio to mitigate the risk that an investor will encounter financial difficulties with the property due to mismanagement or personal problems. In Southern California, most apartment loans feature a maximum 75% LTV for purchases.
However, refinances can mean 70% or less, and other property types can mean 65% or less. On the other hand, high LTV financing is available (up to 90% or more in some cases), but the higher LTV means higher risk to the bank, which means higher interest rates. Unless a property really does have significant upside, most investors are better off with financing using a lower LTV; that way, the property will generate a steady and sufficient cash flow to pay down debt.