Theodore closes on a $380,000 rehab project in Troy, MI, using a hard money loan from Green Fern Investments. The lender agrees to issue a loan with a 55% loan to value (LTV) so they will loan $209,000 on the property. The parameters of the deal also stipulate a four point origination fee which is to be paid at the closing and a 18 month, interest-only note with a 11% interest rate.
By the terms of the deal, Theodore will have to contribute a $8,360 origination fee plus 45% of the purchase price, or $171,000, since there is a 55% LTV. Once the deal closes, he will have to pay Green Fern Investments $1,916 in monthly interest fees, or 11% multiplied times $209,000 divided by 12 months in a year. At the expiration of the loan, he sells the renovated house for $551,000. After subtracting the $34,485 in interest payments ($1,916 multiplied times 18 months), the $8,360 origination fee, the $209,000 principle amount on the loan, and the $171,000 he brought to the closing, he will make a total profit of $128,155 ($551,000 price minus $422,845 in total costs). This profit would be reduced by any renovation costs paid by Theodore.