Judy closes on a $370,000 rehab project in El Dorado, AR, using a private money loan from Downtown Investment Corporation. The terms of the deal include a 75% loan-to-value (LTV), so she must bring 25% of the price as cash at closing, making the principle loan amount $277,500. The terms of the loan dictate a 12% note for 18 months. They also require a 1 point origination fee, which will also be paid upon closing.
By the terms of the deal, Judy will need to pay a $2,775 origination fee in addition to 25% of the sales price, or $92,500, since there is a 75% LTV. The lender will collect $2,775 in monthly interest from the borrower. This is computed by taking the full loan value of $277,500, multiplying by the 12% rate of interest, and then dividing that amount by 12. At the expiration of the loan, she sells the rehabed property for $481,000. After subtracting the $49,950 in interest payments ($2,775 multiplied times 18 months), the $2,775 origination fee, the $277,500 principle amount on the loan, and the $92,500 she brought to the closing, she will earn a total profit of $58,275 ($481,000 sales price minus $422,725 in costs). This profit would then be reduced by any renovation costs paid out of pocket.