Brianna finds a duplex in Oxford, MI to remodel and sell. Since she doesn't have enough cash available to purchase the $280,000 house outright, she decides to take out a private money loan from Smith Funding Company. The loan to value (LTV) on the loan is 70%. This means Brianna will bring 30% of the purchase price to closing and the principle amount will be $196,000 on the deal. The deal also consists of these features: 1) a 18 month term, 2) a 13% interest only note, and 3) a five point origination fee.
Accordingly, Brianna will need to make a $84,000 down payment in addition to paying a $9,800 origination fee. After the deal closes, she will have to pay the lender $2,123 in monthly interest fees, or 13% times $196,000 divided by 12 months in the year. At the expiration of the note, she sells the rehabed house for $392,000. After subtracting the $38,220 in interest expenses ($2,123 times 18 months), the $9,800 origination fee, the $196,000 principle amount on the note, and the $84,000 she brought to closing, she will earn a total profit of $63,980 ($392,000 price minus $328,020 in total costs). This profit would be reduced by any building costs paid by Brianna.