Blanca takes a private money loan from River City Investments in order to renovate a townhome to flip in Brookline, MA. The price of the property is $250,000. The terms of the deal include a 80% loan to value (LTV), so she must contribute 20% of the price as cash to closing, making the principle loan amount $200,000. The loan also has the following features: 1) a 18 month term, 2) a 10% interest only note, and 3) a one point origination fee.
Blanca will have to contribute $50,000 to closing (20% on the 80% loan to value), plus she will have to pay the $2,000 origination fee. After the loan closes, she will have to pay River City Investments $1,667 in monthly interest fees, or 10% times $200,000 divided by 12 months in the year. If Blanca sells the project for $337,500 after 18 months, she would earn a total profit of $55,500 after subtracting the original principle of $200,000, the funds paid at the close of $50,000, the origination points of $2,000, and the aggregate interest payments of $30,000. This profit does not include remodeling costs.