Erik is a house flipper in Ocean Springs, MS. He locates an older property for sale and decides to renovate it and sell it for a profit. The house costs $180,000 but he does not have the full amount so he obtains a private money loan with Riverside Lending Group. As the lender agrees to a 70% loan-to-value, Erik will need to put 30% down and the total amount of the loan will be $126,000. The terms of the deal dictate a 12% note for 18 months. They also stipulate a 4 point origination fee, which will also be paid upon closing.
On top of the $5,040 origination fee, Erik will also need to fund $54,000 of the purchase with his own cash, or 30% of the sales price. The lender will collect $1,260 in monthly interest payments from the Erik. This is computed by taking the total loan amount of $126,000, multiplying that by the 12% rate of interest, and then dividing that number by 12. At the end of the loan, he sells the rehabed house for $270,000. After subtracting the $22,680 in total interest payments ($1,260 multiplied by 18 months), the $5,040 origination fee, the $126,000 principle on the loan, and the $54,000 he contributed to closing, he will earn a gross profit of $62,280 ($270,000 price minus $207,720 in costs). This profit would be reduced by any renovation costs paid by Erik.