Bryan finds a condo in Oak Forest, IL to flip and re-sell. Since he does not have enough cash to acquire the $390,000 project outright, he decides to take out a hard money loan from River City Finance. The lender agrees to issue a note with a 50% loan-to-value (LTV) so they are willing to loan $195,000 on the property. The note is interest only, with monthly payments, and is for 18 months at 10% interest with 5 origination points to be paid when the deal closes.
Bryan will have to bring $195,000 to the closing (50% on the 50% LTV), plus he will have to pay the $9,750 origination fee. The monthly interest only payments will then be $1,625 to the lender. If Bryan sells the property for $507,000 after 18 months, he would then realize a gross profit of $78,000 after deducting the original principle of $195,000, the cash contributed at the close of $195,000, the origination fee of $9,750, and the total interest payments of $29,250. This gross profit does not include building costs.