Miranda takes a loan from Reliance Funding in order to rehab a townhouse to flip in the Strawberry area of Mill Valley, CA. The list price of the house is $390,000. The lender agrees to write a note with a 60% loan to value (LTV) so they are willing to extend $234,000 on the project. The parameters of the loan also stipulate a two point origination fee which is to be paid at closing and a 6 month, interest-only note with a 14% rate of interest.
In addition to paying the $4,680 origination fee, Miranda will also have to fund $156,000 of the purchase with her own money, or 40% of the purchase price. The monthly interest-only payments will then total $2,730 to the lender. At the expiration of the note, she sells the renovated house for $546,000. After subtracting the $16,380 in total interest payments ($2,730 multiplied by 6 months), the $4,680 origination fee, the $234,000 principle amount on the note, and the $156,000 she contributed to closing, she will make a gross profit of $134,940 ($546,000 price minus $411,060 in total costs). This profit would be reduced by any building costs paid by the borrow.