P & J Investment Group makes a private money loan to Albert for a rehab project in Queen Creek, AZ, on a property that costs $150,000. The terms of the deal include a 65% loan to value (LTV), so he must contribute 35% of the price as cash to closing, which makes the principle note amount $97,500. The parameters of the note also include a three percent origination fee which will be paid at closing and a 6 month, interest-only note with a 10% interest rate.
On top of the $2,925 origination fee, Albert will also fund $52,500 of the purchase with his own cash, or 35% of the sales price. Once the deal is closed and Albert takes on the property, he will begin making monthly payments of $813 to the lender ($97,500 principle x 10% / 12 months). At the expiration of the note, he sells the renovated property for $202,500. After subtracting the $4,875 in interest expenses ($813 multiplied by 6 months), the $2,925 origination fee, the $97,500 principle amount on the note, and the $52,500 he contributed to closing, he will make a total profit of $44,700 ($202,500 sales price minus $157,800 in costs). This amount would be reduced by any rehab costs paid by the borrow.