Real Estate Pyramiding

Pyramiding is a technique that maximizes the power of leverage by using the equity in one income property to purchase an additional income property or a larger income property. Most of the real estate in the United States appreciates over time. The savvy real estate investor can take advantage of this by systematically re-leveraging his real estate portfolio as it increases in value. Re-leveraging appreciated property allows the real estate investor to compound future real estate gains. The risks associated with pyramiding include greater debt service expense and the possibility of reduced cash flows. However, the risk can be mitigated with a well thought out plan and sound business judgment. As a real estate investor, you can choose the optimum time to pyramid your real estate investments based on how much your properties have appreciated in value and your tolerance for risk. Several different pyramiding strategies can be used to systematically enlarge your real estate portfolio and increase your net worth.

If you have an income property that has appreciated in value, you can sell it and use the proceeds to purchase a larger income property. If you choose this pyramiding method, you will have to pay capital gains taxes on the sale and a sales commission if you use a realtor. In addition, there will be miscellaneous closing costs connected with the purchase of a larger income property. Be sure to estimate all costs ahead of time to determine the optimum time to re-leverage. You might want to develop a rule of thumb. For example, re-leverage when you have sufficient appreciation growth to purchase a property twice the size of your current property.

Another pyramiding option would be to refinance your income property and use the proceeds to purchase an additional income property. If you are happy with your current income property, you can avoid capital gains taxes and a sales commission via refinancing. You will still have to pay closing costs on the purchase of another income property, but those costs will be less than selling your current property outright and purchasing a larger income property. If you choose this pyramiding method, you will need to estimate the costs associated with acquiring another income property and you will need to assess the impact of refinancing on your cash flows.

Lastly, you can trade your current income property (or properties) for a larger property (or properties) of similar type via a 1031 exchange. You can avoid paying capital gains taxes if you trade your property for a similar type property of equal dollar amount or larger. The tax money that you save can be put towards the purchase of a larger property. You will need to hire a competent attorney or CPA to make sure your exchange complies with IRS guidelines. If you use a realtor, you will still have to pay a sales commission on the exchange / sale of your property and there will be miscellaneous closing costs associated with the acquisition of your new property.

In summary, all real estate investors should be familiar with the above pyramiding strategies. A good understanding of your local economy, the national economy, job trends, vacancy rates, the direction of mortgage rates, etc. can help the real estate investor to choose the best time to pyramid. Pyramiding your real estate portfolio can shorten the time required to achieve your financial goals. A well thought out pyramiding strategy can minimize the risk and compound your gains.

(c) Copyright 2000 – 2006 Advantage Software LLC