Larry finds a townhouse in the Tujunga area of Tujunga, CA to remodel and re-sell. Since he doesn't have enough cash to purchase the $200,000 property outright, he decides to take out a hard money loan from South End Investments. The borrower will be required to contribute 35% of the sales price in cash to the closing based on a 65% loan to value set by the lending company. This makes the principle note from South End Investments $130,000. The rate on the loan is 13% for a term of 12 months and the lender requires a five point origination fee at the close. The interest payments are to be paid on a monthly basis and the principle amount will be repaid after the sale of the property.
According to the parameters of the loan, Larry will be required to contribute a $6,500 origination fee in addition to 35% of the sales price, or $70,000, based on the 65% LTV. The lender will collect $1,408 in monthly interest payments from the Larry. This is calculated by taking the total loan amount of $130,000, multiplying by the 13% interest rate, and then dividing that number by 12. At the end of the note, he sells the renovated property for $280,000. After subtracting the $16,900 in interest payments ($1,408 multiplied times 12 months), the $6,500 origination fee, the $130,000 principle on the note, and the $70,000 he contributed to the closing, he will earn a gross profit of $56,600 ($280,000 price minus $223,400 in costs). This profit would be reduced by any rehab costs paid by Larry.