Lloyd finds a condo in the East Memphis-Colonial-Yorkshire subdivision of Memphis, TN to flip and sell. Since he does not have enough cash on-hand to acquire the $290,000 property outright, he decides to take out a hard money loan from Credence Funding. The loan-to-value (LTV) on the loan is 85%. This means that Lloyd will bring 15% of the sales price to closing and the principle will be $246,500 on the note. The deal also includes these features: 1) a 6 month term, 2) a 9% interest only note, and 3) a three percent origination charge.
Lloyd will have to contribute $43,500 to closing (15% on the 85% loan to value), plus he will pay the $7,395 origination fee. Once the deal closes, he will pay Credence Funding $1,849 in monthly interest payments, or 9% multiplied times $246,500 divided by 12 months in the year. At the end of the note, he sells the renovated house for $377,000. After subtracting the $11,093 in interest expenses ($1,849 multiplied times 6 months), the $7,395 origination fee, the $246,500 principle on the note, and the $43,500 he brought to closing, he will earn a gross profit of $68,513 ($377,000 sales price minus $308,488 in costs). This profit would be reduced by any rehab costs paid by Lloyd.