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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.
The On Target real estate investment analysis software can
assist with your pyramiding strategy. With On Target, you can
run future net worth scenarios based on your yearly assumptions for
income, expense and appreciation. The On Target
software is only $97.95 and provides powerful
and user friendly real estate analysis to help you increase your
income property returns. To purchase On Target, click on
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The On Target real estate investment software includes a 30 day
money back guarantee and free support.
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