Geneva is a real estate investor in Wakefield, MA. She finds a run-down property for sale and decides to renovate it and resell it for a profit. The house costs $340,000 but she doesn't have the full amount so she obtains a private money loan with USA Funding. The terms of the note include a 65% loan-to-value (LTV), so she must contribute 35% of the price as cash to closing, which makes the principle loan amount $221,000. The note is interest-only, with monthly payments, and is for 18 months at 12% interest with 5 origination points paid when the deal closes.
Geneva will need to contribute a total of $32,400 up front to pay the $119,000 down payment plus the $11,050 origination fee. After the deal closes, she will need to pay USA Funding $2,210 in monthly interest payments, or 12% multiplied by $221,000 divided by 12 months in a year. At the expiration of the loan, she sells the rehabed house for $408,000. After subtracting the $39,780 in interest expenses ($2,210 multiplied by 18 months), the $11,050 origination fee, the $221,000 principle on the loan, and the $119,000 she brought to the closing, she will make a total profit of $17,170 ($408,000 sales price minus $390,830 in costs). This profit would then be reduced by any building costs paid out of pocket.