@Melvin Yuen , I almost bought some property in Vallejo because it was, and still is to some extent, beatdown more than other areas. But since I'm a buy and hold investor, and rents/rental demand were so much higher in Richmond for a just a little more money (and better commute to Oak/SF), I bought there.
I absolutely understand why it corrected and could have more to go. Good that you were able to identify the difference between that correction/reversion and the longer-term prospects of Vallejo. I think @Jon Klaus has the right idea. Where is your "extractable" equity best used (after selling costs, expenses, etc)? Extractable = net cash to you after sale. Another way to look at it is to ask yourself, "Would I buy this property again today at the current market price, with the downpayment of my "extractable" equity?" You are deciding to tie up your equity and stay invested at the current market price, which is just like someone buying into the market at that moment. (after taking into account transaction costs..)
So now that we've set the framework, what about your deal? Would you jump into the Vallejo market on a SFH rental at $350K in 2 years..? (this would almost certainly have to be for appreciation potential, because rents out there will not give you much CF at that price from my perspective, unless rents skyrocket.) If you would stay in at that price, why not buy another Vallejo SFH at that price, if you believe in it so much? Or would you hang onto it just because it's a "legacy" asset that you had already? I'm a buy-and-hold investor, and plan to hang on to most of my properties for a long time, so this pains me a little to say.. I think I would 1031X out of this if it hits $350K, or subdivide/sell and keep the lot. And this is definitely impacted by my view of Vallejo.
To be honest, the high and potentially uncertain property taxes, coupled with the less-than-great public schools, and longer commute to most employment centers (unless you drop $300/mo on the ferry) gives Vallejo some headwinds on long-term appreciation IMHO. In addition, the rents and rental demand out there are not great relative to rising prices, especially if they go that high... You may get more correction/reversion returns, but I think the longer-term appreciation will be MUCH slower and MUCH MUCH more speculative IMHO.
As far as selling/1031X, subdivide/partial sale, or cash-out equity.. These are, in order, how much exposure you want to swap out of Vallejo into something else. The 1031X gets rid of all your Vallejo exposure at that price, selling the house and keeping the lot as a kicker gives you some speculative upside if Vallejo keeps going, and the cash-out option gives leveraged exposure to Vallejo, the most concentrated bet on the area.
I would choose the option that is most consistent with your view of Vallejo's further potential at that time, and CF, relative to other investments that are available to you at that time.. My view would be the 1031 or subdivide/partial sale if it goes that high. But I would probably take some cash-out equity now, either way, while rates are still low and there are still deals to be had on more properties.. unless you're so flush with cash for new investments, it doesn't matter..
