P & J Investments issues a hard money loan to Rene for a renovation project in Covington, KY, on a house that is listed for $350,000. The lender agrees to write a loan with a 70% loan-to-value (LTV) so they will extend $245,000 on the property. The parameters of the deal dictate a 13% note for 12 months. They also stipulate a 5 point origination fee, which will also need to be paid at closing.
Accordingly, Rene will need to make a $105,000 down payment plus pay a $12,250 origination fee. The monthly interest only payments will then be $2,654 to the lender. If he sells the renovated house for $525,000 at the end of the 12 month term, his total profit (not accounting for renovation expenses) would be $130,900. This is calculated by taking the purchase price ($525,000) and subtracting the original note amount ($245,000), the origination fee ($12,250), the money he brought to closing ($105,000), and the total interest payments ($31,850).