Terry is a real estate investor in Gwynn Oak, MD. She discovers an run-down property in the Woodlawn neighborhood and wants to renovate it and sell it for a profit. The house has a cost of $380,000 but she doesn't have the full amount so she takes out a hard money loan with Red City Lending Company. Because the lender agrees to a 70% loan to value, Terry will have to put 30% down and the amount of the note will be $266,000. The loan also has these features: 1) a 18 month term, 2) a 13% interest only note, and 3) a two percent origination fee.
Therefore, Terry will have to make a $114,000 down payment in addition to paying a $5,320 origination fee. Once the loan closes, she will have to pay the lender $2,882 in monthly interest fees, or 13% multiplied times $266,000 divided by 12 months in the year. At the end of the note, she sells the rehabed house for $494,000. After deducting the $51,870 in interest expenses ($2,882 multiplied times 18 months), the $5,320 origination fee, the $266,000 principle on the note, and the $114,000 she contributed to closing, she will earn a gross profit of $56,810 ($494,000 sales price minus $437,190 in total costs). This profit would be reduced by any building costs paid by Terry.