Bonnie is a real estate investor in Covina, CA. She locates an run-down property in the Charter Oak area and decides to rehab it and re-sell it for a profit. The property has a cost of $280,000 but she does not have the full amount so she obtains a hard money loan with Acme Funding Group. The borrower will be required to bring 35% of the sales price in cash to the closing based on a 65% loan-to-value set by the lending company. This makes the loan principle from Acme Funding Group $182,000. The terms of the deal also include a four point origination fee that is to be paid at the closing and a 18 month, interest-only note with a 8% rate of interest.
Bonnie will need to fund a total of $32,400 up front to cover the $98,000 down payment plus the $7,280 origination fee. Acme Funding Group will collect $1,213 in monthly interest from the borrower. This is calculated by taking the total note amount of $182,000, multiplying that by the 8% rate of interest, and then dividing that number by 12. At the expiration of the note, she sells the rehabed property for $350,000. After subtracting the $21,840 in interest payments ($1,213 times 18 months), the $7,280 origination fee, the $182,000 principle amount on the note, and the $98,000 she contributed to the closing, she will earn a total profit of $40,880 ($350,000 sales price minus $309,120 in costs). This amount would be reduced by any building costs paid by the borrow.