Gordon is a real estate investor in Florence, AZ. He finds a run-down property and wants to rehab it and resell it for a profit. The house costs $260,000 but he does not have the full amount so he takes a private money loan with Prosperity Finance Company. The lender agrees to write a note with a 85% loan to value (LTV) so they will loan $221,000 on the project. The parameters of the loan also include a three percent origination fee that will be paid at the closing and a 18 month, interest-only note with a 11% interest rate.
Therefore, the borrower will be required to contribute a $39,000 down payment in addition to paying a $6,630 origination fee. Once the deal closes, he will pay Prosperity Finance Company $2,026 in monthly interest payments, or 11% times $221,000 divided by 12 months in the year. If Gordon sells the property for $351,000 after 18 months, he would then realize a total profit of $47,905 after deducting the principle of $221,000, the money contributed at closing of $39,000, the origination fee of $6,630, and the aggregate interest payments of $36,465. This amount does not include rehab costs.