Jeffrey finds a townhouse in Montclair, CA to remodel and sell. Since he doesn't have enough cash available to buy the $200,000 property outright, he decides to take out a private money loan from Deep Lake Investment Company. The lender agrees to make a note with a 70% loan-to-value (LTV) so they will extend $140,000 on the house. The parameters of the deal dictate a 14% note for 12 months. They also require a 5 point origination fee, that will also need to be paid when the property closes.
On top of the $7,000 origination fee, Jeffrey will also need to fund $60,000 of the purchase with his own cash, or 30% of the purchase price. The lender will collect $1,633 in monthly interest payments from the borrower. This is calculated by taking the full loan value of $140,000, multiplying that by the 14% interest rate, and then dividing that number by 12. If Jeffrey sells the project for $280,000 after 12 months, he would then make a total profit of $53,400 after subtracting the principle amount of $140,000, the money paid at the close of $60,000, the origination points of $7,000, and the total interest payments of $19,600. This gross profit doesn't include rehab costs.