Alberto finds a townhouse in Rancho Cordova, CA to renovate and sell. Since he doesn't have enough cash on-hand to buy the $180,000 project outright, he takes out a private money loan from Evergreen Investment Company. The loan to value (LTV) on the loan is 70%. This means that Alberto will have to bring 30% of the purchase price to closing and the principle amount will be $126,000 on the deal. The loan also has these features: 1) a 6 month term, 2) a 12% interest only note, and 3) a one percent origination fee.
On top of the $1,260 origination fee, Alberto will also need to fund $54,000 of the purchase with his own cash, or 30% of the purchase price. Once the loan closes, he will have to pay Evergreen Investment Company $1,260 in monthly interest fees, or 12% multiplied by $126,000 divided by 12 months in the year. Assuming Alberto sells the remodeled project for $234,000 at the end of the 6 month term, his total profit (not accounting for renovation costs) would be $45,180. This is computed by taking the sales price ($234,000) and subtracting the original principle ($126,000), the origination fee ($1,260), the funds he brought to closing ($54,000), and the total interest expenses ($7,560).