Allen is a house flipper in Ponchatoula, LA. He locates an older property for sale and decides to renovate it and resell it for a profit. The house has a cost of $240,000 but he does not have the full amount so he takes a hard money loan with Smith Investment Group. The terms of the note include a 80% loan to value (LTV), so he must bring 20% of the price as cash to closing, which makes the principle note amount $192,000. The parameters of the note also stipulate a five point origination fee that is to be paid at the closing and a 12 month, interest only note with a 12% interest rate.
By the parameters of the note, Allen will need to contribute a $9,600 origination fee in addition to 20% of the purchase price, or $48,000, since there is a 80% LTV. Once the loan closes, he will have to pay Smith Investment Group $1,920 in monthly interest payments, or 12% times $192,000 divided by 12 months in a year. At the expiration of the note, he sells the rehabed house for $360,000. After subtracting the $23,040 in total interest payments ($1,920 times 12 months), the $9,600 origination fee, the $192,000 principle on the note, and the $48,000 he brought to the closing, he will make a gross profit of $87,360 ($360,000 sales price minus $272,640 in total costs). This amount would then be reduced by any building costs paid by Allen.