Daryl takes a loan from All American Finance Company in order to rehab a duplex to flip in the Lake Claire neighborhood of Decatur, GA. The list price of the house is $160,000. The borrower will need to fund 35% of the purchase price in cash to closing based on a 65% loan-to-value stipulated by the lender. This makes the principle note from All American Finance Company $104,000. The rate on the loan is 11% for a term of 18 months and the company requires a one point origination fee at the closing. The interest payments are to be paid monthly and the principle will be returned after the sale of the property.
In addition to paying the $1,040 origination fee, Daryl will also have to fund $56,000 of the purchase with his own cash, or 35% of the purchase price. After the loan is executed and Daryl takes over the project, he will need to begin making payments each month of $953 to All American Finance Company ($104,000 principle x 11% / 12 months). At the end of the loan, he sells the renovated house for $192,000. After subtracting the $17,160 in interest payments ($953 multiplied by 18 months), the $1,040 origination fee, the $104,000 principle amount on the loan, and the $56,000 he brought to closing, he will earn a gross profit of $13,800 ($192,000 price minus $178,200 in costs). This amount would be reduced by any renovation costs paid out of pocket.