Andy takes a loan from Flippers Finance Company in order to renovate a townhome to flip in the Napili-Honokowai neighborhood of Lahaina, HI. The sales price of the house is $160,000. The loan-to-value (LTV) on the loan is 80%. This means Andy will need to bring 20% of the purchase price to closing and the principle will be $128,000 on the note. The loan also includes the following features: 1) a 12 month term, 2) a 9% interest only note, and 3) a four percent origination fee.
On top of the $5,120 origination fee, Andy will also fund $32,000 of the purchase with his own money, or 20% of the purchase price. Once the loan is closed and Andy takes on the project, he will have to begin making monthly payments of $960 to Flippers Finance Company ($128,000 principle x 9% / 12 months). If Andy sells the project for $216,000 after 12 months, he would then earn a total profit of $39,360 after subtracting the original principle of $128,000, the cash contributed at closing of $32,000, the origination fee of $5,120, and the aggregate interest payments of $11,520. This amount doesn't account for building costs.