Oscar is a real estate investor in San Carlos, CA. He discovers an older property for sale and decides to renovate it and re-sell it for a profit. The house has a cost of $360,000 but he does not have the full amount so he takes out a hard money loan with XYZ Lending Group. 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 loan amount $234,000. The parameters of the note also include a five point origination fee which is to be paid at the closing and a 6 month, interest only note with a 10% rate of interest.
Oscar must bring a total of $32,400 up front to pay the $126,000 down payment in addition to the $11,700 origination fee. After the loan closes, he will have to pay XYZ Lending Group $1,950 in monthly interest payments, or 10% multiplied times $234,000 divided by 12 months in the year. Oscar's plan is to complete the renovation by the end of the 6 months and re-sell it for $468,000. If he succeeds he will make a total profit of $84,600 ($468,000 sales price - $234,000 principle - $126,000 cash at closing - $11,700 origination points - $11,700 in total interest paid.