Albert finds a townhouse in Miami Gardens, FL to rehab and sell. Since he does not have enough cash available to acquire the $150,000 project outright, he takes out a hard money loan from South Shore Finance Corporation. The loan to value (LTV) on the note is 80%. This means that Albert will bring 20% of the purchase price to closing and the principle amount will be $120,000 on the note. The note is interest-only, with monthly payments, and is for 12 months at 14% interest with 2 origination points to be paid at the closing.
The borrower will need to bring a total of $32,400 upon closing to cover the $30,000 down payment plus the $2,400 origination fee. After the loan is closed and Albert takes over the property, he will have to begin making payments each month of $1,400 to the lender ($120,000 principle x 14% / 12 months). At the end of the note, he sells the rehabed house for $217,500. After subtracting the $16,800 in total interest payments ($1,400 times 12 months), the $2,400 origination fee, the $120,000 principle amount on the note, and the $30,000 he contributed to closing, he will make a gross profit of $48,300 ($217,500 price minus $169,200 in costs). This amount would be reduced by any renovation costs paid by the borrow.