J & T Lending Company makes a private money loan to Flora for a renovation project in Winter Springs, FL, on a house that is listed for $360,000. The loan to value (LTV) on the loan is 75%. This means that Flora will need to bring 25% of the sales price to the closing and the principle will be $270,000 on the note. The loan also has these features: 1) a 18 month term, 2) a 13% interest-only note, and 3) a four percent origination charge.
In addition to paying the $10,800 origination fee, Flora will also need to fund $90,000 of the purchase with her own cash, or 25% of the sales price. After the loan is executed and Flora takes the property, she will have to begin making monthly payments of $2,925 to the lender ($270,000 principle x 13% / 12 months). At the expiration of the loan, she sells the rehabed house for $468,000. After subtracting the $52,650 in interest expenses ($2,925 multiplied by 18 months), the $10,800 origination fee, the $270,000 principle on the loan, and the $90,000 she contributed to the closing, she will earn a gross profit of $44,550 ($468,000 price minus $423,450 in costs). This amount would then be reduced by any building costs paid by Flora.