The Loan Amount Isn't Always the Number That Matters: How Real Estate Investors Should Think About the Capital Stack

Purchase price, LTV, CLTV, ARV, seller financing, gap funding and existing equity can all change how much cash you actually need to complete a real estate investment.

You found the property and the numbers look good.

Then you talk to a lender and hear - “We can finance 75%.”

Your immediate reaction might be - “I'm a little short of the 25%. Maybe I need to walk away.”

Not necessarily.

One of the biggest mistakes I see investors make is looking at one lending percentage and assuming that tells them how the entire transaction will be financed. It doesn't. The primary loan may only be one piece of the capital stack.

Depending on the transaction, there may be seller financing, Gap Funding / Investment Assistance, equity sitting in another property or another financing structure that changes how much cash you actually need.

There may also be another calculation—such as ARV—that limits how much a lender can provide.

That's why I don't like starting with, “How much will you lend me?”

I'd rather start with, “What are you trying to accomplish, and what's the best way to structure the capital to get you there?”

A 75% Loan Doesn't Always Mean You Need 25% Cash

Let's start with a simple example.

You're buying a $1 million multifamily or mixed-use property.

Breclaw can potentially provide primary financing of up to 75% LTV, subject to the specific deal and program requirements.

That could look like this:

• Purchase Price: $1,000,000

• Primary Loan: $750,000

• Remaining Purchase Price: $250,000

It's easy to look at those numbers and conclude, “I need $250,000 of my own money.”

But that's not necessarily where the financing conversation ends.

Depending on the transaction and program approval, additional capital could potentially include:

• A seller-held second

• Gap Funding / Investment Assistance

• Other approved secondary financing

Some of our current multifamily and mixed-use programs allow up to 90% maximum CLTV, subject to the specific transaction, secondary financing structure and program approval.

That brings us to an important distinction.

What's the Difference Between LTV and CLTV?

This sounds like lender jargon, but the difference is actually pretty simple.

LTV means Loan-to-Value.

It measures the primary loan against the property's value.

On our $1 million purchase, if Breclaw provides a $750,000 first mortgage:

$750,000 ÷ $1,000,000 = 75% LTV

Now let's introduce a second source of financing.

Suppose the seller is willing to hold a $150,000 second mortgage, and that structure is approved under the loan program.

Now the transaction looks like this:

Purchase Price: $1,000,000

Breclaw First Mortgage: $750,000

Seller-Held Second: $150,000

Total Financing: $900,000

Combined LTV: 90%

The Breclaw first mortgage is still only 75% LTV. But the combined financing is now 90% CLTV.

That's what CLTV means. Combined Loan-to-Value looks at the total financing secured by the property, not just the first mortgage. And look at what happened to the investor's potential cash requirement.

Originally, you thought you needed $250,000, or 25% of the purchase price.

With $900,000 of combined financing, the remaining portion of the purchase price is $100,000 or 10%.

That doesn't include closing costs and other transaction expenses, but we've already changed the conversation dramatically. And potentially, that remaining 10% is another part of the capital stack we can look at.

When Breclaw is providing the primary financing, there may be situations where our Gap Funding / Investment Assistance can help cover some or potentially all of the remaining cash requirement, subject to the specific deal, available structure and program approval.

Think about where we started. “I'm short of the 25%. Maybe I need to walk away.”

Now we're asking, “Can we structure the first mortgage, approved secondary financing and potential Gap Funding in a way that makes the transaction work?”

That's a completely different conversation.

LTV asks: How large is the primary loan?

CLTV asks: How much total financing is secured by the property?

Gap Funding asks: Can we help solve some or all of the remaining cash requirement when Breclaw is providing the primary financing?

That's why, 75% LTV May Not Be the End of the Financing.

Before you walk away because you're a little short of the down payment, let's look at the entire deal.

Fix & Flip Investors Have a Different Calculation to Worry About

Now let's look at a fix-and-flip.

Suppose you're buying a property for $200,000 and expect to spend $80,000 on the rehab.

The program offers up to:

90% of the purchase = $180,000

and

100% of the rehab = $80,000

At first glance:

$180,000 + $80,000 = $260,000

You might reasonably assume you're getting a $260,000 loan.

But there's another calculation.

Let's say the completed property is expected to be worth $340,000 and the program caps the total loan at 75% of ARV.

75% of $340,000 is $255,000. Suddenly, the $260,000 you expected is capped at $255,000. You're bringing another $5,000 you may not have planned for. And depending on the program, your credit profile can also affect the leverage available to you.

That's why I tell investors:

Don't just ask what percentage of the purchase and rehab a lender offers. Ask what calculation ultimately caps your loan. I would much rather calculate that before you write the offer than after you've signed the contract and your earnest money is on the line.

Sometimes the Missing Capital Is Already Sitting in Another Property

Here's another situation I see.

An investor finds the next opportunity.

The numbers work.

But he's short on cash for the down payment, rehab, construction or closing costs.

So he starts looking for someone to provide the missing money.

One of my first questions is:

What else do you own?

Maybe you have a rental worth $500,000 with only $150,000 owed against it.

Maybe you own another investment property free and clear.

Maybe you've built substantial equity across several properties.

You're looking for cash while potentially sitting on significant equity.

Depending on the situation, an investor second mortgage, cash-out refinance or cross-collateralization strategy may allow us to explore whether some of that equity can become part of the financing solution.

In other words:

Your next down payment may already be sitting inside your portfolio.

Show me what you own before you tell me how much cash you're short.

Gap Funding Is Part of the Structure, Not a Standalone Product

There's an important distinction about Breclaw's Gap Funding / Investment Assistance.

We're not looking to provide a standalone gap loan behind someone else's primary financing.

When Breclaw provides the primary financing, we may also be able to help structure the remaining capital requirement.

Depending on the transaction, that could potentially involve:

• Gap Funding / Investment Assistance

• Seller financing

• Existing property equity

• Approved secondary financing

or another structure appropriate for the transaction. None of these structures are automatic.

Every deal still has to make sense and satisfy the requirements of the applicable programs.

But the objective isn't to force every investor into the same financing formula.

The question is. What combination of capital makes sense for this particular deal?

That's why I like saying, don't bring us the gap. Bring us the deal.

Construction Investors Need to Look Beyond Lumber and Concrete

The capital-stack concept isn't limited to acquisitions.

It matters in ground-up construction too.

An investor might think:

Land + Construction = Project Cost

But a real construction budget has more moving pieces.

There are the obvious hard costs:

Labor.

Lumber.

Concrete.

Electrical.

Plumbing.

Roofing.

But there are also soft costs that can't be ignored.

Architectural expenses.

Engineering.

Permits.

Insurance.

Professional fees.

Carrying costs.

And other expenses necessary to move the project from plans to completion.

Then there's another critical part of the financing analysis:

Who's actually building it?

The strength of the builder and construction team can be the backbone of the deal.

We may require a builder resume showing previous projects and experience that supports the builder's ability to complete a project of that type and size.

Because:

The construction budget isn't just what you think the building will cost. It's part of the lender's roadmap for getting the project from dirt to completion.

High-Value Investment Properties Create Their Own Capital Questions

The same thinking applies when you're buying or refinancing a high-value residential investment property.

Don't automatically assume a traditional bank is your only option.

Breclaw has Jumbo Investment Loan options reaching up to $10 million for qualifying residential investment properties. Depending on the applicable program, options may include purchase financing, refinancing, cash-out, simple documentation, and financing for qualifying foreign investors and ITIN borrowers.

These programs can also create financing options for qualifying high-end Airbnb and short-term rental investment properties. But even here, I don't want to start with, “what's the biggest loan I can get?”

I'd rather ask, “what's the best way to structure the capital for what you're trying to accomplish?”

Stop Shopping for a Loan. Start Structuring the Deal.

Real estate investors often approach financing by calling lenders and asking:

“What's your rate?”

“What's your LTV?”

“How much will you lend?”

Those are important questions, but they don't tell the entire story.

When you bring me a deal, I want to understand:

What's the purchase price?

What's the property worth?

What's the rehab or construction budget?

What debt already exists?

How much cash do you have available and how much do you actually want to put into the transaction?

What other properties do you own?

What's your approximate credit profile?

What's your exit strategy?

Because once I understand the entire transaction, we can determine which number actually controls the deal.

Maybe it's LTV.

Maybe it's CLTV.

Maybe it's ARV.

Maybe it's your available equity.

Maybe it's the construction budget.

Maybe it's your credit profile.

Or maybe the transaction can be structured very differently than you originally thought.

Before You Walk Away Because You're Short on Cash, Show Me the Deal

This is really the point of this entire article. You find an investment property you want to buy. The numbers work.

Then you find out the primary lender is financing 75%, and you think:

“I'm a little short of the 25%. Maybe I need to walk away.”

Don't make that decision yet.

Bring me the complete picture:

• Purchase price.

• Property value.

• Existing debt.

• Rehab or construction budget.

• Available cash.

• Approximate credit.

• Properties you already own.

And what you're trying to accomplish.

Then let's determine what is actually controlling the transaction and whether there's another way to structure the capital.

Don't bring me a loan request. Bring me the deal.

Breclaw Capital Investment Property Financing | Fix & Flip | Multifamily & Mixed-Use | Jumbo | New Construction | Gap Funding | Investor Second Mortgages