Roberto is an investor in Glastonbury, CT. He finds a run-down property for sale and wants to rehab it and re-sell it for a profit. The property has a cost of $300,000 but he doesn't have the full amount so he takes out a hard money loan with BCC Funding. Since the lender agrees to a 60% loan to value, Roberto will have to put 40% down so the principle amount of the note will be $180,000. The interest rate on the note is 9% for a term of 6 months and the company requires a two point origination fee at closing. The interest payments are to be paid monthly and the principle amount will be paid back after the sale of the property.
According to the parameters of the deal, Roberto will be required to contribute a $3,600 origination fee plus 40% of the sales price, or $120,000, since there is a 60% LTV. After the deal is closed and Roberto takes over the project, he will need to begin making payments each month of $1,350 to BCC Funding ($180,000 principle x 9% / 12 months). At the expiration of the loan, he sells the rehabed property for $420,000. After subtracting the $8,100 in interest payments ($1,350 times 6 months), the $3,600 origination fee, the $180,000 principle amount on the loan, and the $120,000 he brought to closing, he will make a gross profit of $108,300 ($420,000 price minus $311,700 in costs). This profit would be reduced by any building costs paid by the borrow.