Charles is a real estate investor in Flint, MI. He finds a run-down property and decides to remodel it and sell it for a profit. The house costs $340,000 but he does not have the full amount so he obtains a hard money loan with Number One Investments. The lender agrees to issue a loan with a 50% loan to value (LTV) so they are willing to extend $170,000 on the property. The deal also consists of the following features: 1) a 18 month length, 2) a 11% interest only note, and 3) a five percent origination fee.
On top of the $8,500 origination fee, Charles will also have to fund $170,000 of the purchase with his own funds, or 50% of the purchase price. The lender will collect $1,558 in monthly interest payments from the Charles. This is calculated by taking the total loan amount of $170,000, multiplying by the 11% rate of interest, and then dividing that amount by 12. At the expiration of the loan, he sells the renovated house for $510,000. After deducting the $28,050 in interest expenses ($1,558 multiplied by 18 months), the $8,500 origination fee, the $170,000 principle amount on the loan, and the $170,000 he contributed to the closing, he will earn a gross profit of $133,450 ($510,000 price minus $376,550 in costs). This profit would then be reduced by any renovation costs paid by Charles.