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 a real estate boom, many individuals may buy homes as their investments. Then, when 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 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 rental property.
• Real estate is a 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 “underwater” — 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 can 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 the real estate professional to determine whether renting it out might be another option.
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