Harold takes a loan from North Star Funding Corporation in order to remodel a duplex to flip in Independence, KY. The list price of the property is $220,000. Since the lender agrees to a 70% loan-to-value, Harold will need to put 30% down so the amount of the note will be $154,000. The deal also includes the following features: 1) a 18 month term, 2) a 10% interest only note, and 3) a four percent origination fee.
In accordance with the parameters of the loan, Harold will need to pay a $6,160 origination fee plus 30% of the sales price, or $66,000, based on the 70% LTV. Once the deal is executed and Harold takes on the project, he will need to begin making payments each month of $1,283 to North Star Funding Corporation ($154,000 principle x 10% / 12 months). At the expiration of the loan, he sells the renovated property for $330,000. After deducting the $23,100 in interest expenses ($1,283 multiplied times 18 months), the $6,160 origination fee, the $154,000 principle amount on the loan, and the $66,000 he brought to the closing, he will make a total profit of $80,740 ($330,000 price minus $249,260 in total costs). This amount would then be reduced by any renovation costs paid by the borrow.