Tyler finds a townhouse in Bristol, CT to flip and resell. Since he does not have enough cash to acquire the $250,000 property outright, he decides to take out a private money loan from West End Investments. The lender agrees to make a note with a 75% loan to value (LTV) so they are willing to loan $187,500 on the property. The rate on the loan is 11% for a length of 18 months and the lender requires a two point origination fee at the close. The interest payments are to be paid on a monthly basis and the principle amount will be returned after the sale of the property.
Tyler will need to contribute $62,500 to closing (25% on the 75% LTV), plus he will pay the $3,750 origination fee. Once the loan is executed and Tyler takes on the project, he will need to begin making monthly payments of $1,719 to West End Investments ($187,500 principle x 11% / 12 months). If Tyler sells the property for $325,000 after 18 months, he would make a total profit of $40,313 after deducting the principle amount of $187,500, the cash contributed at the close of $62,500, the origination points of $3,750, and the aggregate interest payments of $30,938. This profit does not account for building costs.