Clarice is a real estate investor in Indio, CA. She discovers an older property in the Bermuda Dunes subdivision and decides to renovate it and resell it for a profit. The house has a cost of $330,000 but she does not have the full amount so she takes a hard money loan with East Star Investment Company. As the lender sets a 65% loan to value, Clarice will be required to put 35% down so the total amount of the loan will be $214,500. The parameters of the deal dictate a 14% note for 6 months. They also require a 1 point origination fee, that will also be paid upon closing.
Clarice will have to contribute $115,500 at the closing (35% on the 65% loan to value), plus she will pay the $2,145 origination fee. The monthly interest-only payments will then total $2,503 to the lender. At the end of the loan, she sells the renovated house for $396,000. After deducting the $15,015 in total interest payments ($2,503 times 6 months), the $2,145 origination fee, the $214,500 principle on the loan, and the $115,500 she brought to the closing, she will make a gross profit of $48,840 ($396,000 sales price minus $347,160 in total costs). This profit would be reduced by any rehab costs paid out of pocket.