Patrick is a real estate investor in Howell, MI. He finds an older property and decides to rehab it and sell it for a profit. The house costs $340,000 but he does not have the full amount so he takes a private money loan with Red City Funding Company. The borrower will be required to fund 30% of the sales price in cash to the closing based on a 70% loan to value set by the lending company. This makes the principle note from Red City Funding Company $238,000. The parameters of the note also include a four percent origination fee that is to be paid at the closing and a 18 month, interest-only note with a 13% rate of interest.
Patrick will have to contribute $102,000 to the closing (30% on the 70% loan-to-value), plus he will have to pay the $9,520 origination fee. The lender will collect $2,578 in monthly interest payments from the borrower. This is computed by taking the full loan value of $238,000, multiplying that by the 13% rate of interest, and then dividing that amount by 12. At the end of the loan, he sells the rehabed house for $408,000. After subtracting the $46,410 in total interest payments ($2,578 times 18 months), the $9,520 origination fee, the $238,000 principle on the loan, and the $102,000 he brought to the closing, he will make a gross profit of $12,070 ($408,000 price minus $395,930 in total costs). This amount would then be reduced by any building costs paid by the borrow.