Lance finds a property in the Midway area of Sanford, FL to flip and re-sell. Since he does not have enough cash available to acquire the $220,000 property outright, he decides to take out a private money loan from Famous Investment Group. Because the lender sets a 80% loan-to-value, Lance will be required to put 20% down and the total amount of the loan will be $176,000. The parameters of the deal dictate a 12% note for 18 months. They also stipulate a 1 point origination fee, which will also be paid when the property closes.
Lance will need to bring $44,000 to the closing (20% on the 80% loan-to-value), plus he will need to pay the $1,760 origination fee. The lender will collect $1,760 in monthly interest payments from the Lance. This is calculated by taking the total loan value of $176,000, multiplying by the 12% interest rate, and then dividing that number by 12. At the end of the note, he sells the rehabed property for $264,000. After deducting the $31,680 in interest payments ($1,760 times 18 months), the $1,760 origination fee, the $176,000 principle on the note, and the $44,000 he brought to the closing, he will earn a total profit of $10,560 ($264,000 price minus $253,440 in total costs). This amount would then be reduced by any rehab costs paid out of pocket.