Share Your Pyramiding Real Estate Portfolio Strategies

[2ndstory]

As I continue to grow my portfolio and design my plan for continuing its growth, I've started to wonder how others are doing it. If you are willing to share your rules for yourself when pyramiding (using the equity in your buildings to help you purchase more), I would appreciate hearing about how you are doing it.



Nik

 

[JohnKrahn]

I had a case where the bank used equity from other properties to finance a current purchase almost 100%. They simply register the mortgage on both properties. This would assume that there is enough equity in another property....



If you use this approach you need to be careful....you may create a negative cash flow problem!

 

[ChrisDavies]

And a blanket mortgage can severely restrict your exit strategy.

 

[bizaro86]

I suspect taking out helocs or refinancing your existing properties is a better strategy than using a blanket mortgage, because you have more flexibility as Chris mentions.



I'm considering the same problem myself. I have equity in my properties, which I could borrow against "pyramid" into more properties. That's great as long as things keep working, but another big downturn might give that strategy a negative outcome.



I haven't figured out exactly what rules I'm going to work by on that, preferring for now to take the more conservative approach of buying only when I can use hard cash for the downpayments. I have thought about the problem, however, and I've got some suggestions.



1) Use re-advancable helocs for the downpayment funds, and never go more than 80% LTV. For the 'V' in that, don't use the highest appraised value you can get your hands on, instead, take the lower of the appraised value minus 10% and your purchase price plus 3% per year for inflation. That way you don't get caught borrowing against inflated property during a boom to purchase more inflated property during a boom.



2) Tighten your criteria for buying. If you currently require $X cashflow per property, require $2X cashflow when "pyramiding" with a borrowed downpayment.



3) Stress test your portfolio, including the debt used for downpayments. If it doesn't work with lower rents and higher rates, don't buy it with borrowed money.



Now, these are just some things you might want to think about, not my personal rules, as I haven't decided on anything as of yet.



I'd also be extremely interested in hearing the controls others use when deciding whether to increase their leverage.



Regards,



Michael

 

[Thomas Beyer]

it works best if you can raise property values quickly, usually THROUGH UPGRADES.



Thus, buy ugly, say for $250,000 ... spend $20,000 or so on it to upgrade it, now it may be worth $300,000 .. lever at 70-75% and use surplus cash to buy another one !



Be very careful though not to overlever as too much debt is the biggest problem of a growing real estate portfolio. While variable rates might stay low for a while, fixed rates might go up 1% by year-end 2011 .. so budget a 5% interest rate using a 25 year amortization with a 10% vacancy using realistic rents and expenses .. and also stress test with 6.5% interest rate and a 15% vacancy in a flat to -10% rent market .. and you will see that pyramiding can work well in a rising market but can back-fire quickly in a sluggish market !



You will also find that many lenders will not lend you more money after 3 or 5 properties unless you have very strong income. Therefore, consider switching to commercial real estate at that time, including the residential portion of commercial: multi-family !



Proceed with caution !

 

[RussellWestcott]

The number 1 thing you MUST do is manage is the cash flow... Just because you may have equity available to you, doesn't mean you should tap into it. The only metric I measure is the cash flow must support the equity take-out (and that does not mean break-even)



The trap that many people fall into when they look at their portfolio is "Gee I'm sitting at 55% LTV and I have $400,000 available to me if I take that up to 80% LTV... what can go wrong?" You pull out all of this money and sink all of it into more properties All of a sudden, BANG, you have a year of special assessments (or renovations) across your portfolio... now what?



Now for the solution, and to help answer your question (or at least the solution that has helped me)... Leave the buffer and equity in the portfolio and learn how to raise Other peoples' money... use this capital, to build your portfolio, you may only be getting a percentage share of the new property, but you are growing your portfolio.



I don't know any Real Estate investor who has built up a sizable portfolio without the help of raising money from other people (which can come in many different forms).



The art of raising other peoples' money I'll save for another topic, or perhaps I should write a book ... or a home-study program... .



Anyways I better get back to my writing and I have a workshop to prepare for tonight... 300+ BC investors coming out tonight, its going to be a full house.

 

[bizaro86]

[quote user=RussellWestcott] perhaps I should write a book


It seems to me like your and Don's upcoming book on "Real Estate Joint Ventures" would be a (bestselling I'm sure!) introduction into that area.



Regards,



Michael

 

[2ndstory]

Thanks Michael and Thomas. Those are the types of answers I'm looking for. I'm looking to see how others are doing it and the rules they follow. OPM seems to always be the answer that is quoted; maybe because it is the answer, but I am more interested in how individuals are growing their portfolios on their own.



Nik

 

[REINteam]

Hi Nik,



Most, if not all investors will run into two 'walls' - money and credit...either you tie up all your investment capital OR you simply can't qualify for any further traditional purchases. As you have pointed out, you may have equity, but pulling out cash might not be the answer to growing your portfolio with the least amount of risk.



Some investors go to Multi-Family, like Thomas has mentioned, due to the different financing rules...but with Multi-Family you will still need capital.



With that said, if partnering isn't in your future one method some REIN` Members use for building their portfolio when cash and/or credit dry up is creative real estate transactions: AFS, RTO, fix/flip, etc - all with risk and all requiring advanced education to execute properly. Some of the REIN` members who focus on the quick turn world are doing very well and creating substantial capital from these 'no cash' deals...some are using that profit to build up investment capital for buy and hold - so creative strategies (cost associated with these) to build cash for further investing.



Other than creative quick turn type investments the other option I see is work harder and make more income from your JOB to be able to buy and/or qualify for more purchases...hence more investors go the route of raising OPM.



Sure there is opportunity for leveraging your current investments to buy more, but as pointed out, always watch your overall cashflow AND your exit strategy.