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What is the loan evaluation criteria for Real Estate Debt?
What is the loan evaluation criteria for Real Estate Debt?
Korin Hedlund avatar
Written by Korin Hedlund
Updated over a week ago

Generally, real estate debt investments are evaluated for their investment potential and risks. Below are some of the most impactful factors impacting risks and investment potential:

  • Borrower’s experience & creditworthiness: Borrowers are often ranked based on their years in the real estate industry, how many similar projects they’ve successfully completed, and if they work in real estate full or part-time. A borrower’s credit profile, including liquid reserves and their FICO credit score, is also considered. Generally, lower-risk borrowers have several years of experience in the field, have completed several similar-sized projects, and are well-capitalized.

  • Loan to ARV (after-repair value): The loan-to-ARV ratio represents the proportion of the loan amount — including any additional property debt — to the estimated after-repair value (ARV) of the property, typically expressed as a percentage. This ratio includes the property appraisal from a qualified appraiser. A project with a lower LTARV generally has a higher likelihood of recovering its principal balance in the event of any downside scenarios.

  • Loan position: Loans on a real estate project have different levels of standing in terms of both principal and interest payment. Loans in the first position are considered senior debt and have the first priority of repayment, resulting in lower risk potential for investors. ( Learn more about the capital stack and the repayment priorities in What Is the Capital Stack?)

  • Property location: Local market dynamics can significantly influence exit liquidity - whether via sale or refinancing - and the value of a property post-completion, with lower-risk projects typically situated in robust real estate markets.

In addition to the above four criteria, many other factors are considered when determining an individual loan's risk and return potential. For example, any additional collateral or guarantees that secure the loan, the project scope, and whether there are any prepayment penalties.

For more details, check out the Introduction to Real Estate Debt Investing.

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