Danny closes on a $340,000 rehab project in Arvada, CO, using a private money loan from Progressive Funding Company. The terms of the loan include a 75% loan-to-value (LTV), so he must contribute 25% of the price as cash at closing, making the principle note amount $255,000. The loan also includes these features: 1) a 18 month term, 2) a 11% interest only note, and 3) a two point origination fee.
Accordingly, Danny will be required to make a $85,000 down payment in addition to paying a $5,100 origination fee. The monthly interest only payments will then total $2,338 to the lender. At the expiration of the note, he sells the renovated property for $510,000. After subtracting the $42,075 in interest expenses ($2,338 times 18 months), the $5,100 origination fee, the $255,000 principle amount on the note, and the $85,000 he brought to the closing, he will earn a total profit of $122,825 ($510,000 sales price minus $387,175 in total costs). This profit would be reduced by any rehab costs paid out of pocket.