Jenifer finds a townhome in Asheboro, NC to flip and resell. Since she doesn't have enough cash to acquire the $240,000 house outright, she takes out a hard money loan from River View Lending Corporation. The loan-to-value (LTV) on the note is 70%. This means Jenifer will need to bring 30% of the purchase price to the closing and the principle will be $168,000 on the loan. The terms of the deal dictate a 12% note for 12 months. They also stipulate a 1 point origination fee, that will also have to be paid when the property closes.
Jenifer will have to bring $72,000 at closing (30% on the 70% loan-to-value), plus she will pay the $1,680 origination fee. The lender will collect $1,680 in monthly interest payments from the Jenifer. This is calculated by taking the total loan amount of $168,000, multiplying by the 12% rate of interest, and then dividing that number by 12. At the end of the loan, she sells the rehabed house for $348,000. After deducting the $20,160 in interest expenses ($1,680 times 12 months), the $1,680 origination fee, the $168,000 principle on the loan, and the $72,000 she brought to the closing, she will make a total profit of $86,160 ($348,000 price minus $261,840 in costs). This amount would be reduced by any renovation costs paid by the borrow.