Orange County Ladera Ranch Property

[Daniel Choi]

Hey all! New to BP. Would love all of your thoughts. Please be brutally honest! I own a townhome in Ladera Ranch, CA. Its a really nice neighborhood. Bought in 2019 pretty high. We recently moved to KY. This townhouse was our residence. We are now renting it out. 

Pros of the property:

1) really nice townhouse, end unit, young families love to live in this area. I don't really seem demand going down. Super safe. Lots of parks. Very unique. 

2) Has appreciated 40K this past year (but I'm not sure its going to get any higher). Now worth 580K

3) I have a good PM, so I don't think too much about the property

4) well built house that doesn't have many problems

Cons:

1) negative cash flow 150-250/month (though I would be pretty fine taking the hit at this point in time)

2) not sure if the area is going to appreciate any more

Our options seem to be:

1. Sell the house, do a 1031 and buy in Louisville (maybe a 4 plex?) that can cash flow

2. Sell the house (and break even) and wait for the market to cool before buying again

3. Accept the negative cash flow and raise the rent every year. 

Main questions: How does one know if an area will appreciate any more? (My friend's parents have a townhome in SF Bay area that appreciated 300%) and what should I do? Thanks ya'll!

[Joe Homs]

@Daniel Choi  

1st of all lets talk about your 1031 exchange.  Since you purchased the home in 2019 and just about immediately began renting it out has really not much to do with a 1031 exchange.  You said that there is about 40K in equity?  Is this after all expenses are paid or before.  I will assume that it is before which will leave you no profit to exchange?  Your basis is calculated at purchase price minus sales price and not all the money you put down on the home.  This was also your principal residence so different tax rules apply.  Either way since you have owned for a short period of time, so I would check with your CPA for more clarification.

California is on a ten year appreciation cycle and we are overdue for a correction.  My crystal ball is broken right now so I can't tell you when the correction will be here, but I am concern with the upcoming elections next year.  

Honestly I would suggest that you sell, take whatever money is left and invest close to you.  I don't see why you would pay a portion of someone else's rent?  It should work the other way around.  Come back to California when the market is down and buy everything that you can.  At that point hold onto it forever.

Good investing...