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Real Estate Pyramiding
Pyramiding is a method of maximising leverage on appreciated investment properties. It utilises the appreciated value of an investment property to acquire another investment property with greater income earning potential. This can be either in the form of increased sales or rental income. For pyramiding to be cost effective there must be a significant increase in income earning potential for any newly acquired investment property. Real pyramiding can operate in the following ways.
Salestime lags in acquisitions, appreciation and sales
associated costs such as advertising, legal expenses, commissions, taxes etc.
simultaneous appreciation of other properties at a greater rate than the investment property currently in one's possession making them too expensive to buy
If an investment property has appreciated in value then it can be sold for significantly more than its original purchase price. The proceeds then can be used to purchase another property which, if it appreciates, can be sold for even more potential income. Some of the disadvantages of this pyramiding technique are:
Renthigher mortgage expenses which may negate any rental increases
refurbishments and property maintenance expenses
A variation of the above is rental based pyramiding whereby a newly acquired property can attract significantly more rental income than one's original investment property. Therefore instead of being sold, the new property is leased out. However, this pyramiding strategy has limitions of which some are:
Otherre-mortgaging one's appreciated property for a higher amount than the original mortgage
obtaining higher rental income via sub-dividing one's existing property
Any additional income can be used to place a deposit on another investment property. This property can in turn generate higher rental income because of its greater value. However, this has disadvantages which are:
greater debt service expenses
possible reduced cash flows
Pyramiding can also involve retaining one's existing property while using any leverage to acquire another investment property either for sales or rental income. Examples of this are: