Affluent Funding Corporation issues a private money loan to Kevin for a rehab project in the Cottonwood-Verde Village subdivision of Cottonwood, AZ, on a property that costs $340,000. The borrower will have to fund 50% of the sales price in cash to closing based on a 50% loan to value set by the lender. This makes the loan principle from Affluent Funding Corporation $170,000. The loan also has these features: 1) a 12 month length, 2) a 9% interest-only note, and 3) a five point origination charge.
Therefore, Kevin will be required to contribute a $170,000 down payment plus pay a $8,500 origination fee. After the loan is closed and Kevin takes over the property, he will have to begin making payments each month of $1,275 to Affluent Funding Corporation ($170,000 principle x 9% / 12 months). At the expiration of the note, he sells the renovated property for $442,000. After deducting the $15,300 in interest payments ($1,275 multiplied times 12 months), the $8,500 origination fee, the $170,000 principle on the note, and the $170,000 he contributed to closing, he will make a total profit of $78,200 ($442,000 sales price minus $363,800 in costs). This profit would then be reduced by any renovation costs paid out of pocket.