June is a house flipper in Hacienda Heights, CA. She discovers a run-down property for sale and decides to remodel it and re-sell it for a profit. The property costs $290,000 but she doesn't have the full amount so she takes a private money loan with Smith Finance Company. The borrower will need to fund 15% of the purchase price in cash to closing based on a 85% loan-to-value set by the lender. This makes the principle amount from Smith Finance Company $246,500. The parameters of the note also stipulate a three point origination fee which is to be paid at closing and a 18 month, interest only note with a 12% rate of interest.
In addition to paying the $7,395 origination fee, June will also fund $43,500 of the purchase with her own cash, or 15% of the purchase price. she will then pay $2,465 monthly to Smith Finance Company. At the expiration of the note, she sells the renovated property for $362,500. After deducting the $44,370 in interest expenses ($2,465 multiplied times 18 months), the $7,395 origination fee, the $246,500 principle amount on the note, and the $43,500 she brought to closing, she will make a total profit of $20,735 ($362,500 price minus $341,765 in total costs). This profit would then be reduced by any rehab costs paid by June.