Bradley finds a townhome in the Kalaoa subdivision of Kailua Kona, HI to renovate and resell. Since he doesn't have enough cash to acquire the $230,000 property outright, he decides to take out a hard money loan from Hometown Lending Company. Since the lender sets a 80% loan-to-value, Bradley will have to put 20% down and the total amount of the loan will be $184,000. The parameters of the note also stipulate a four percent origination fee that will be paid at closing and a 12 month, interest only note with a 14% rate of interest.
Bradley will need to bring $46,000 at closing (20% on the 80% loan to value), plus he will pay the $7,360 origination fee. The lender will collect $2,147 in monthly interest payments from the Bradley. This is calculated by taking the full loan value of $184,000, multiplying by the 14% rate of interest, and then dividing that amount by 12. If Bradley sells the project for $322,000 after 12 months, he would make a total profit of $58,880 after deducting the principle amount of $184,000, the money contributed at closing of $46,000, the origination points of $7,360, and the aggregate interest payments of $25,760. This amount doesn't account for rehab costs.