Brenda finds a property in the University Park Estates area of Seal Beach, CA to rehab and re-sell. Since she doesn't have enough cash to acquire the $270,000 project outright, she takes out a hard money loan from East Star Investment Company. The lender agrees to make a loan with a 75% loan-to-value (LTV) so they will extend $202,500 on the house. The loan is interest only, paid monthly, and is for 18 months at 8% interest with 2 origination points paid at the closing.
In accordance with the terms of the loan, Brenda will be required to pay a $4,050 origination fee plus 25% of the sales price, or $67,500, based on the 75% LTV. Once the loan is closed and Brenda takes on the property, she will have to begin making monthly payments of $1,350 to East Star Investment Company ($202,500 principle x 8% / 12 months). At the end of the loan, she sells the renovated property for $364,500. After subtracting the $24,300 in interest expenses ($1,350 multiplied by 18 months), the $4,050 origination fee, the $202,500 principle on the loan, and the $67,500 she contributed to the closing, she will make a total profit of $66,150 ($364,500 sales price minus $298,350 in costs). This profit would be reduced by any rehab costs paid out of pocket.