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
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!
Hi Daniel, I'm familiar with Ladera Ranch and if were you and could handle the negative cash flow for a few years... I would hold onto the property for the long term. California has a steady rate of appreciation and so the bigger picture looks promising if you hold onto it. However, if your goal is to have money right now... 1031-ing into a multi family property that is closer to you would be a great option! I guess it really comes down to your goals for your portfolio.... Do you want money now or later? ☺️
@Kendra Levy got it right- depends on what your goals are. 1031 is a great option for building your wealth. But, if you want cash now 1031 is not the answer. Happy to walk you through the options if you want.
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.
Thanks for the reply! I guess my question is how much higher can it get? Have we pretty much hit the ceiling? Thanks!
Thanks for the reply! Would definitely love to hear more!
Love the response! Bought at 540 and it seems to be worth 580. I might be mistaken but if I use a 1031, I can escape the 40k capital gains tax? If I just sold and did not reinvest, then after taxes and re agent fees and closing costs I would probably break even.
Good advice about the 10 year cycle. Sounds like: 1) sell now and lose nothing (and wait to invest during the down season), or 2) hold on, lose money each month, and hope for marginal appreciation. Am I understanding this correctly? Any other word of wisdom? Thank you!
If you sell at $580K then your commissions and closing costs are around 5% ($29,000) then your looking at a profit of $11K? and not $40K? Your tax on that would be about $2-3K in long term capital gains. Please check with your CPA. The 1031 exchange costs around $750.00 and you must acquire a property of the same price or higher with the same loan you have now. You must identify your replacement property in a short period of time as well. Lots of moving parts to save a small amount on taxes in my opinion.
My opinion is still for you to sell.
@Daniel Choi , I don't think a 1031 is going to be appropriate for you on this property. First, as @Joe Homs , your net profit is really not that great to justify even the relatively small expense of the 1031. But more importantly it has been your primary residence. Even though you have not lived in it for 2 years yet you may very well qualify to take whatever gain there is tax free if you moved to KY for one of the exception reasons - a job related transfer, military transfer, health, or unforseen circumstance. Your accountant can confirm.
But regardless remember that if you dont' sell you'll be holding on to an asset that has appreciated maybe 7-8% but has also cost you XX? in negative expenses. That's probably not something you want to sustain for too long.