Samuel is a house flipper in Auburn, ME. He finds a run-down property for sale and decides to renovate it and re-sell it for a profit. The property has a cost of $260,000 but he doesn't have the full amount so he takes a private money loan with Coastal Investment Company. The lender agrees to make a loan with a 80% loan-to-value (LTV) so they are willing to loan $208,000 on the house. The loan also consists of these features: 1) a 12 month term, 2) a 14% interest only note, and 3) a two percent origination charge.
Accordingly, the borrower will be required to make a $52,000 down payment plus pay a $4,160 origination fee. Once the loan is closed and Samuel takes on the project, he will need to begin making monthly payments of $2,427 to the lender ($208,000 principle x 14% / 12 months). If Samuel sells the project for $377,000 after 12 months, he would earn a gross profit of $83,720 after deducting the principle amount of $208,000, the cash contributed at the close of $52,000, the origination points of $4,160, and the total interest payments of $29,120. This profit doesn't include rehab costs.