Pyramid Financing - Real Estate - US - In the world of creative real estate financing, one of the best methods to quickly build wealth is to use pyramid finance. This method is used widely and can be combined with other creative financing techniques. The term pyramid should not be confused with the sales pyramid which is illegal. The finance pyraid is where you start small, and as you expand your equity, you use that equity as the security for a down payment or investment funds for more property. However one of the pitfalls of the technique is you can overleverage your investment. 

Definition: Pyramid finacning is where you pledge the equity on your property you own (or have under contract), as security for another investment.

Example 1 - You own a vacant lot you are holding onto with the idea of building a new home one day. You purchased it for $50,000 with a small down payment ten years ago. You owe $10,000 on the lot and estimate its value to be around $100,000. You want to buy a small apartment building that you feel you can buy for $150,000. There is an existing first mortgage of $100,000 and you have $20,000 in cahs. You offer the seller the following:

1. You will assume the existing first mortgage of $100,000

2. You give the seller $20,000

3. You offer the seller a second mortgage on your lot in the amount of $30,000

If the sellers primary goal is to get rid of the apartments, and he or she is not in need of immediate cash then this method can work quite well. There can also be tax benfits to the seller in this kind of situation if he she has a gain in the apartment building.

Example 2 

The same basic situation has occured except the seller only has an existing first mortgage of $50,000 on the apartment complex. This gives him greater equity than you can come up with unless he takes a second mortgage on the apartment complex. The pyramid works wel here too. You offer to pay his price of $150,000. 

1. You get a new first mortgage in the amount of $100,000, and pay of the existing $50,000.

2. You pay him cash on closing in the amount of $50,000

3. You will give a second mortgage on your lot for $50,000

In this deal the seller gets a lot of cash and you get to save most of your $20,000 cash

Richard Sinton

Bsc, Cemap, IAD, Cep 1

https://www.linkedin.com/in/richard-theo-sinton-cep-1-8b165522/