Hillary takes a hard money loan from All Star Investment Group in order to renovate a townhome to flip in Norwalk, CT. The sales price of the house is $160,000. Because the lender sets a 75% loan to value, Hillary will need to put 25% down and the principle amount of the loan will be $120,000. The parameters of the loan also include a two percent origination fee that will be paid at the closing and a 6 month, interest-only note with a 12% rate of interest.
Therefore, Hillary will have to make a $40,000 down payment plus pay a $2,400 origination fee. The lender will collect $1,200 in monthly interest payments from the borrower. This is computed by taking the total loan amount of $120,000, multiplying by the 12% rate of interest, and then dividing that number by 12. At the expiration of the note, she sells the rehabed house for $232,000. After subtracting the $7,200 in total interest payments ($1,200 multiplied by 6 months), the $2,400 origination fee, the $120,000 principle on the note, and the $40,000 she contributed to the closing, she will make a total profit of $62,400 ($232,000 sales price minus $169,600 in costs). This profit would then be reduced by any rehab costs paid by the borrow.