Earl is a real estate investor in Zionsville, IN. He finds an older property in the Snacks-Guion Creek area and wants to rehab it and sell it for a profit. The house costs $280,000 but he does not have the full amount so he takes a private money loan with All State Finance Group. The borrower will need to contribute 20% of the sales price in cash to the closing based on a 80% loan-to-value stipulated by the lender. This makes the loan principle from All State Finance Group $224,000. The parameters of the note also stipulate a one point origination fee that will be paid at the closing and a 12 month, interest-only note with a 13% interest rate.
Earl will need to bring $56,000 to closing (20% on the 80% loan to value), plus he will pay the $2,240 origination fee. All State Finance Group will collect $2,427 in monthly interest from the Earl. This is computed by taking the full loan value of $224,000, multiplying that by the 13% interest rate, and then dividing that number by 12. At the end of the note, he sells the renovated house for $420,000. After subtracting the $29,120 in total interest payments ($2,427 times 12 months), the $2,240 origination fee, the $224,000 principle amount on the note, and the $56,000 he contributed to the closing, he will make a total profit of $108,640 ($420,000 price minus $311,360 in total costs). This amount would then be reduced by any renovation costs paid by the borrow.