Smith Investment Corporation makes a hard money loan to Constance for a rehab project in Livonia, MI, on a property that is listed for $280,000. The terms of the note include a 65% loan-to-value (LTV), so she must bring 35% of the price as cash to closing, which makes the principle loan amount $182,000. The loan also consists of the following features: 1) a 6 month length, 2) a 14% interest only note, and 3) a one percent origination fee.
Constance will need to bring $98,000 to the closing (35% on the 65% loan-to-value), plus she will have to pay the $1,820 origination fee. Once the loan is closed and Constance takes on the project, she will have to begin making monthly payments of $2,123 to Smith Investment Corporation ($182,000 principle x 14% / 12 months). If Constance sells the house for $336,000 after 6 months, she would realize a total profit of $41,440 after deducting the original principle of $182,000, the cash paid at closing of $98,000, the origination fee of $1,820, and the total interest payments of $12,740. This gross profit does not include building costs.