Angela closes on a $400,000 renovation project in the Iroquois Point subdivision of Ewa Beach, HI, using a hard money loan from K & M Lending Company. The loan-to-value (LTV) on the loan is 55%. This means that Angela will have to bring 45% of the sales price to the closing and the principle amount will be $220,000 on the loan. The parameters of the loan also stipulate a four percent origination fee that is to be paid at the closing and a 12 month, interest only note with a 12% interest rate.
Angela will need to bring $180,000 at closing (45% on the 55% loan-to-value), plus she will need to pay the $8,800 origination fee. The monthly interest-only payments will then total $2,200 to the lender. At the expiration of the loan, she sells the renovated house for $600,000. After deducting the $26,400 in total interest payments ($2,200 times 12 months), the $8,800 origination fee, the $220,000 principle amount on the loan, and the $180,000 she brought to the closing, she will earn a total profit of $164,800 ($600,000 sales price minus $435,200 in total costs). This amount would be reduced by any rehab costs paid out of pocket.