East End Lending issues a hard money loan to Kevin for a remodeling project in Rock Island, IL, on a property that costs $210,000. The lender agrees to issue a loan with a 85% loan-to-value (LTV) so they are willing to extend $178,500 on the property. The terms of the deal dictate a 10% note for 18 months. They also stipulate a 2 point origination fee, which will also have to be paid when the property closes.
On top of the $3,570 origination fee, Kevin will also have to fund $31,500 of the purchase with his own funds, or 15% of the purchase price. The monthly interest only payments will then be $1,488 to the lender. At the expiration of the loan, he sells the renovated property for $262,500. After deducting the $26,775 in interest payments ($1,488 times 18 months), the $3,570 origination fee, the $178,500 principle on the loan, and the $31,500 he contributed to the closing, he will make a total profit of $22,155 ($262,500 price minus $240,345 in total costs). This profit would be reduced by any renovation costs paid out of pocket.