Theodore is a real estate investor in Fernandina Beach, FL. He locates an older property and decides to remodel it and resell it for a profit. The property costs $180,000 but he doesn't have the full amount so he takes out a hard money loan with West Star Investments. The lender agrees to make a loan with a 75% loan-to-value (LTV) so they will loan $135,000 on the property. The interest rate on the loan is 14% for a term of 18 months and the company requires a one point origination fee at the closing. The interest is to be paid monthly and the principle will be returned after the property sells.
Theodore will need to contribute $45,000 to closing (25% on the 75% loan to value), plus he will need to pay the $1,350 origination fee. Once the loan closes, he will need to pay the lender $1,575 in monthly interest fees, or 14% multiplied times $135,000 divided by 12 months in the year. At the expiration of the loan, he sells the renovated property for $243,000. After subtracting the $28,350 in total interest payments ($1,575 multiplied times 18 months), the $1,350 origination fee, the $135,000 principle amount on the loan, and the $45,000 he contributed to the closing, he will earn a total profit of $33,300 ($243,000 price minus $209,700 in costs). This amount would be reduced by any rehab costs paid out of pocket.