Marvin finds a condo in Rancho Santa Margarita, CA to renovate and resell. Since he doesn't have enough cash to acquire the $280,000 house outright, he decides to take out a private money loan from Investors Funding Group. The terms of the note include a 70% loan to value (LTV), so he must bring 30% of the price as cash to closing, which makes the principle note amount $196,000. The parameters of the loan dictate a 8% note for 6 months. They also require a 3 point origination fee, that will also have to be paid when the property closes.
According to the parameters of the note, Marvin will be required to contribute a $5,880 origination fee plus 30% of the purchase price, or $84,000, based on the 70% LTV. The monthly interest only payments will then total $1,307 to Investors Funding Group. If Marvin sells the project for $336,000 after 6 months, he would realize a gross profit of $42,280 after deducting the principle amount of $196,000, the funds paid at closing of $84,000, the origination points of $5,880, and the total interest payments of $7,840. This gross profit doesn't include building costs.