Melinda is an investor in Amherst, MA. She locates an older property for sale in the South Amherst subdivision and decides to rehab it and re-sell it for a profit. The property has a cost of $360,000 but she does not have the full amount so she takes a hard money loan with P & J Funding. The lender agrees to write a note with a 85% loan to value (LTV) so they will loan $306,000 on the property. The terms of the deal dictate a 13% note for 12 months. They also stipulate a 3 point origination fee, which will also need to be paid upon closing.
Melinda will need to contribute $54,000 at the closing (15% on the 85% loan-to-value), plus she will pay the $9,180 origination fee. Once the loan closes, she will pay the lender $3,315 in monthly interest fees, or 13% multiplied by $306,000 divided by 12 months in the year. Assuming she sells the renovated project for $486,000 at the end of the 12 month term, her gross profit (not including renovation expenses) would be $77,040. This is computed by taking the purchase price ($486,000) and subtracting the original note amount ($306,000), the origination cost ($9,180), the cash she contributed to closing ($54,000), and the total interest payments ($39,780).