Lawrence takes a hard money loan from Rolling Brook Funding Company in order to remodel a house to resale in Homestead, FL. The price of the house is $200,000. The loan-to-value (LTV) on the deal is 60%. This means that Lawrence will need to bring 40% of the sales price to closing and the principle will be $120,000 on the note. The interest rate on the loan is 9% for a term of 12 months and the company requires a one point origination fee at the closing. The interest payments are to be paid on a monthly basis and the principle amount will be paid back after the property sells.
On top of the $1,200 origination fee, Lawrence will also have to fund $80,000 of the purchase with his own money, or 40% of the sales price. Once the deal closes, he will need to pay the lender $900 in monthly interest fees, or 9% multiplied times $120,000 divided by 12 months in the year. If Lawrence sells the property for $240,000 after 12 months, he would then realize a gross profit of $28,000 after subtracting the original principle of $120,000, the money paid at closing of $80,000, the origination fee of $1,200, and the total interest payments of $10,800. This gross profit doesn't include renovation costs.