Nicholas is an investor in Dorchester, MA. He discovers an run-down property for sale in the North Dorchester area and wants to rehab it and resell it for a profit. The house has a cost of $340,000 but he doesn't have the full amount so he takes a hard money loan with Investors Finance Company. The lender agrees to make a loan with a 75% loan to value (LTV) so they are willing to extend $255,000 on the property. The loan is interest only, paid monthly, and is for 12 months at 10% interest with 5 points to be paid when the deal closes.
Nicholas will have to bring $85,000 at closing (25% on the 75% LTV), plus he will have to pay the $12,750 origination fee. After the deal closes, he will have to pay Investors Finance Company $2,125 in monthly interest fees, or 10% multiplied by $255,000 divided by 12 months in a year. If Nicholas sells the rehabed house for $425,000 at the end of the 12 month term, his total profit (not including rehab expenses) would be $46,750. This is computed by taking the purchase price ($425,000) and subtracting the original note amount ($255,000), the origination fee ($12,750), the funds he contributed to closing ($85,000), and the total interest expenses ($25,500).