Harriet is an investor in Wichita, KS. She locates an run-down property for sale in the Courtland area and decides to renovate it and re-sell it for a profit. The property has a cost of $210,000 but she doesn't have the full amount so she takes out a private money loan with West Shore Finance Company. The loan-to-value (LTV) on the loan is 70%. This means that Harriet will bring 30% of the purchase price to closing and the principle amount will be $147,000 on the note. The loan also consists of the following features: 1) a 18 month length, 2) a 14% interest-only note, and 3) a five point origination charge.
Harriet will need to fund a total of $32,400 up front to cover the $63,000 down payment plus the $7,350 origination fee. Once the loan closes, she will have to pay the lender $1,715 in monthly interest payments, or 14% times $147,000 divided by 12 months in a year. If Harriet sells the house for $315,000 after 18 months, she would make a gross profit of $66,780 after subtracting the principle of $147,000, the funds paid at the close of $63,000, the origination points of $7,350, and the aggregate interest payments of $30,870. This gross profit doesn't account for rehab costs.