Milton takes a loan from Big Money Lending Corporation in order to remodel a townhouse to flip in the Granada Hills subdivision of Granada Hills, CA. The price of the property is $210,000. The loan-to-value (LTV) on the loan is 85%. This means Milton will need to bring 15% of the sales price to the closing and the principle will be $178,500 on the note. The parameters of the note also stipulate a five percent origination fee that is to be paid at the closing and a 18 month, interest-only note with a 9% rate of interest.
Milton will need to contribute $31,500 at the closing (15% on the 85% loan to value), plus he will have to pay the $8,925 origination fee. Once the loan closes, he will have to pay Big Money Lending Corporation $1,339 in monthly interest payments, or 9% multiplied times $178,500 divided by 12 months in a year. Assuming he sells the rehabed project for $294,000 at the end of the 18 month term, his total profit (not accounting for rehab expenses) would be $50,978. This is computed by taking the purchase price ($294,000) and subtracting the original principle ($178,500), the origination cost ($8,925), the cash he brought to closing ($31,500), and the total interest payments ($24,098).