33 Guidelines for investing in real estate....................

Guideline #21:  Pyramiding is not to be undertaken lightly

Pyramids stand the test of time.........only if they have really strong foundations.

Pyramiding, the practice of using the equity in one property to secure the financing to acquire another property, is not to be undertaken lightly.  As with leverage (See Guideline #20), pyramiding can be your friend, or your worst nightmare.

With a strong foundation (well maintained properties with strong tenants, ample cash flow with reserves on hand, and a respectable amount of equity) a pyramid will build solid wealth.

With a weak foundation (poorly maintained properties with transitional tenants, little or no cash reserves, but perceived equity) a pyramid is nothing but a house of cards - soon to be tumbling down.

Not so many years ago, a good friend, who was a really smart stock market guy, was in a real estate partnership with an aggressive and hungry partner.  The two made an investment in a 20 unit apartment that threw off lots of cash.  After a cash rich year, the aggressive partner convinced my friend that they should buy an 8 unit apartment complex, 100% financed with zero money down.  While the newly acquired units would have negative cash flow at first, the surplus money from the first project would certainly cover the losses and then some.  Next, they bought a 16 unit building under the exact same conditions.  Not bad.  Except that they forgot Guideline #14 (sometimes cash flow is just another word for deferred maintenance).   The first investment building that was supporting the other two investments had a dire need for maintenance, however, all the cash flow from that building was going to support the mortgages on the second and third investments.  The maintenance did not get done.  After a passage of time the tenants publicly complained, and the Health Department got involved.  Ultimately, the Health Department declared the 20 unit apartment "unfit" for human habitation and caused it to be vacated.  Ouch.  Their house of cards came tumbling down.  It was not pretty.  Ultimately, the partners reached a separation agreement and my friend was left to solve the whole problem himself.  It was a struggle and cost a him great deal of money and time, but it got solved.  If only......