Terrance finds a townhouse in the Tarzana area of Tarzana, CA to renovate and resell. Since he does not have enough cash on-hand to buy the $290,000 project outright, he takes out a private money loan from J & T Funding Company. The terms of the deal include a 60% loan-to-value (LTV), so he must bring 40% of the price as cash at closing, which makes the principle note amount $174,000. The terms of the loan also include a three percent origination fee that is to be paid at closing and a 18 month, interest-only note with a 13% interest rate.
In addition to paying the $5,220 origination fee, Terrance will also fund $116,000 of the purchase with his own funds, or 40% of the purchase price. The lender will collect $1,885 in monthly interest payments from the borrower. This is computed by taking the full note value of $174,000, multiplying that by the 13% interest rate, and then dividing that amount by 12. If Terrance sells the property for $391,500 after 18 months, he would then make a gross profit of $62,350 after deducting the original principle of $174,000, the money paid at the close of $116,000, the origination points of $5,220, and the total interest payments of $33,930. This gross profit does not account for renovation costs.