River City Lending Company issues a private money loan to Manuel for a renovation project in Agoura Hills, CA, on a house that costs $210,000. The terms of the loan include a 55% loan to value (LTV), so he must bring 45% of the price as cash at closing, making the principle note amount $115,500. The interest rate on the note is 8% for a term of 6 months and the lender requires a one point origination fee at the closing. The interest is to be paid on a monthly basis and the principle amount will be repaid after the sale of the property.
Therefore, the borrower will need to make a $94,500 down payment in addition to paying a $1,155 origination fee. he will then pay $770 per month to River City Lending Company. At the end of the note, he sells the renovated house for $315,000. After subtracting the $4,620 in interest expenses ($770 multiplied by 6 months), the $1,155 origination fee, the $115,500 principle on the note, and the $94,500 he contributed to closing, he will make a total profit of $99,225 ($315,000 price minus $215,775 in total costs). This profit would then be reduced by any building costs paid out of pocket.