Jose is a real estate investor in Brighton, MI. He discovers a run-down property and decides to remodel it and re-sell it for a profit. The property costs $210,000 but he does not have the full amount so he takes out a hard money loan with Pretty Perfect Funding. The lender agrees to issue a loan with a 60% loan-to-value (LTV) so they are willing to extend $126,000 on the project. The rate on the note is 12% for a length 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 will be repaid after the sale of the property.
Jose must contribute a total of $32,400 upon closing to cover the $84,000 down payment in addition to the $1,260 origination fee. Once the loan is executed and Jose takes on the project, he will need to begin making payments each month of $1,260 to Pretty Perfect Funding ($126,000 principle x 12% / 12 months). At the expiration of the loan, he sells the rehabed property for $273,000. After deducting the $7,560 in interest expenses ($1,260 times 6 months), the $1,260 origination fee, the $126,000 principle amount on the loan, and the $84,000 he brought to the closing, he will make a total profit of $54,180 ($273,000 sales price minus $218,820 in costs). This profit would then be reduced by any rehab costs paid out of pocket.