Brian is a real estate investor in Immokalee, FL. He finds a run-down property for sale and wants to renovate it and re-sell it for a profit. The house costs $270,000 but he does not have the full amount so he obtains a hard money loan with XYZ Investment Corporation. The borrower will need to fund 45% of the purchase price in cash to the closing based on a 55% loan-to-value stipulated by the lending company. This makes the loan principle from XYZ Investment Corporation $148,500. The parameters of the deal also include a five point origination fee which is to be paid at the closing and a 18 month, interest-only note with a 11% interest rate.
According to the parameters of the loan, Brian will have to contribute a $7,425 origination fee in addition to 45% of the purchase price, or $121,500, based on the 55% LTV. After the loan is closed and Brian takes on the project, he will need to begin making payments each month of $1,361 to the lender ($148,500 principle x 11% / 12 months). If Brian sells the property for $378,000 after 18 months, he would then realize a gross profit of $76,073 after deducting the principle amount of $148,500, the funds contributed at the close of $121,500, the origination fee of $7,425, and the total interest payments of $24,503. This amount does not account for remodeling costs.