Stephen takes a loan from Red City Finance Corporation in order to renovate a condo to flip in the Evergreen area of Kalispell, MT. The sales price of the house is $370,000. The lender agrees to write a note with a 65% loan-to-value (LTV) so they are willing to extend $240,500 on the property. The parameters of the loan also include a three percent origination fee that will be paid at the closing and a 18 month, interest-only note with a 12% rate of interest.
According to the parameters of the note, Stephen will have to contribute a $7,215 origination fee plus 35% of the purchase price, or $129,500, based on the 65% LTV. Once the deal is closed and Stephen takes the project, he will need to begin making monthly payments of $2,405 to Red City Finance Corporation ($240,500 principle x 12% / 12 months). If he sells the rehabed project for $536,500 at the end of the 18 month term, his total profit (not accounting for renovation expenses) would be $115,995. This is calculated by taking the purchase price ($536,500) and subtracting the principle ($240,500), the origination fee ($7,215), the money he contributed to closing ($129,500), and the total interest expenses ($43,290).