Funding? Yes. Experience? None. Drive? Plenty.

[Alexander Rogers]

Hello everyone!

I am a 20 year old sophomore in college who founded an investment club at my university. Through this club I have made connections with a professor who generously offered up to $50,000 in seed money to fund my first real estate deal. I have zero experience in real estate, other than what I watch/listen/read and aspire to do. This professor is willing to fund future deals if this one is successful, its an opportunity I cannot let pass by.

Although my professor & university are located in Michigan, we are looking to invest in Lancaster PA. I have lived in this area for my entire life (until attending university last year), and know it like the back of my hand. Driving around as a teenager I found the rural country landscape was slowly changing, and the city/suburbs were growing. Land in Lancaster county is king. As of now I have a 12 mile radius set where I am looking for deals. I believe and have seen proof of this area changing gradually overtime from a very poor area to the choice location for million dollar properties. 

Since I have a good idea of the area to invest in, I was wondering what the next steps I should take are? Here are some questions I have...

1) I hear a lot about the benefits of forming an LLC, is this truly something I should be creating before I do my first deal?

2) I plan on finding extra financing for the deal. I will be using the $50,000 as a down payment to leverage the deal. What is the best way for a 20 year old college student to secure financing? (with little credit, not bad, just not much history)

3) As of now I am focusing on vacant lots, with the idea of dividing the land up so multiple homes can be built. Since I don't have any experience, I find myself intimidated by the construction process. As a beginner do you think a new construction will put me over my head? If so what kind of "beginner" deals should I be looking for? (In your personal opinion)

 4) Lastly, if a deal does happen in the future, what is an appropriate percentage of profits to ask for? (I would be doing all day to day work and managing the properties, my professor's role will solely be the investor. (Sweat Equity if you will)

Thank you!

[Serge Brice]

2) For someone with no credit you would have to go with a hard money lender. I have a few contact in the York and Lancaster area.

3) Focusing on a vacant lot to start with is going to be a bit challenging. You're going to have to jump through a lot of hoops and spend a ton before you reach the building process

4) Give me a call, I'll shoot you over my contact we can talk more in depth

[Serge Brice]

2) For someone with no credit you would have to go with a hard money lender. I have a few contact in the York and Lancaster area.

3) Focusing on a vacant lot to start with is going to be a bit challenging. You're going to have to jump through a lot of hoops and spend a ton before you reach the building process

4) Give me a call, I'll shoot you over my contact we can talk more in depth

[Eric Marofske]

Re #1, you will definitely want to form a business entity when partnering with someone on the deal.

It's going to be very difficult to secure a construction loan for a ground up project with limited experience/net worth. Also, I'm not privy to the price of land in your market, but with $50k you are likely undercapitalized.

[George Despotopoulos]

Hi Alexander, congrats on getting involved at such a young age! That is definitely admirable and inspiring to others out there. 

As an aside, I would definitely advise looking in the Michigan market as well. Great rental yields. 

1) I would partner with your professor and form an LLC. LLC will give an added benefit/protection.

2) Really depends on your FICO/credit score. If you're above a 600 you should be able to secure financing. Investment property loans differ to residential. Expect higher fees. But do try to take advantage of big banks, local community banks, and/or credit unions. Your ability to secure financing may vary depending on whether or not you form the LLC though, some lenders do not lend to entities. Regardless, at your stage and young age, I would definitely talk to as many lenders as I can. As a student, I'm certain you can find the time and you'll only benefit.

Another issue is that most bank's have a net worth requirement and want to know where the downpayment is coming from. This will be easier to explain if you partner with your professor in an LLC as a gift cannot comprise 100% of the downpayment.

3) I think each scenario will be new and unique to you. Meaning if it's a fix & flip, if it's a rehab project, buy & hold, or ground-up...it's all new to you. Developing a vacant lot is definitely much more difficult and intense project. This may also be difficult to obtain financing for. I would keep the option open and pitch it to lenders (credit unions/local community banks will be the goal, with private/specialty lenders and hard money lenders secondary). 

4) This is something tough to discern. It's pretty much up to you two. Without the cash there's no deal but without your work and execution there is nothing as well....I would propose 65/35 in favor of your professor. This is merely my opinion. The rationale being it shows respect and appreciation to the professor who is giving you this opportunity, while still valuing your hard work. Really even if you get 25% that is a win. You're getting a tremendous opportunity here to gain some significant experience at such an early age and do not have to risk any of your own money.