It is important to understand the advantages and disadvantages of owning a rental property and its influence on your financing and credit history.
During the heyday of the recent real estate boom (and later, bust), many Americans bought homes. Due to the market crash, they may find themselves holding property that they can no longer afford or that remains unoccupied for other reasons.
If you find yourself with a vacant property, one option to consider is to lease it out in order to make some rental income. This might be a better strategy than selling the property at a loss or simply letting it go into foreclosure.
Here are some of the pros and cons of holding a rental property.
• Renting can provide you with extra income, as long as the rent is higher than the mortgage payments and other expenses combined.
• Holding a property while a down market recovers can prevent the negative impact of a short sale or foreclosure, and if property values climb, the real estate might even produce a profit later on.
• Real estate is tangible, usable property with value beyond a mere dollar figure: you can live in it. (You can't do that with a stock certificate or other intangible asset.)
Traditionally, real estate has been a builder of wealth when acquired and managed wisely, notwithstanding the recent subprime mortgage crisis.
• As many learned from the real estate bust, houses don't always go up in value, and can even go "under water" — meaning you owe more than the property is worth.
• Market rents fluctuate, and your property may produce less rental income than you anticipated or even sit vacant for several months, causing financial strain.
• Dealing with tenants and the maintenance of a property is something to which not everyone is able to dedicate time and energy.
Effect on credit
If your rental property has a mortgage, it will most likely be reported to the credit bureaus by your lender, unless it's a private loan. The balance will show up as a current liability, meaning that it will be counted against your debt-to-income ratios when applying for financing, such as a car loan.
On the other hand, the older the mortgage is on the rental property, the more favorably it may be viewed as part of your credit history. This is especially true if the balance has been paid down considerably. The important thing to note is that, like any other credit item, a mortgage has the potential of affecting your credit score depending on how you manage it.
While selling a property might seem to be your only choice, consult with your financial adviser and real estate professional to determine whether renting it out might be another option.
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What You Need to Know:
There are various types of credit scores, and lenders use a variety of different types of credit scores to make lending decisions. The credit score you receive is based on the VantageScore 3.0 model and may not be the credit score model used by your lender.
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