Jimmie is an investor in Ramona, CA. He finds an run-down property in the San Diego Country Estates neighborhood and decides to renovate it and resell it for a profit. The house has a cost of $150,000 but he doesn't have the full amount so he obtains a private money loan with Suburban Investment Corporation. The lender agrees to make a loan with a 85% loan-to-value (LTV) so they will loan $127,500 on the house. The deal also has the following features: 1) a 18 month length, 2) a 11% interest only note, and 3) a one point origination fee.
In addition to paying the $1,275 origination fee, Jimmie will also need to fund $22,500 of the purchase with his own cash, or 15% of the sales price. Once the deal is executed and Jimmie takes over the project, he will begin making monthly payments of $1,169 to Suburban Investment Corporation ($127,500 principle x 11% / 12 months). At the expiration of the loan, he sells the renovated house for $210,000. After subtracting the $21,038 in interest expenses ($1,169 times 18 months), the $1,275 origination fee, the $127,500 principle on the loan, and the $22,500 he brought to closing, he will make a total profit of $37,688 ($210,000 sales price minus $172,313 in costs). This profit would be reduced by any rehab costs paid by the borrow.