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In the event you have an investment property that have lost 10% value since 2005. Is returning a -30% in terms of revenue.

Costs are $12,915 (including mortgage payments) and Revenue (rental income) is $9000 in this example you will have a yearly loss of $3915 every year, thus -30% loss.

The buyer market is bad, so people are not buying properties.

In this scenario, the only option that I can see is giving up the property, but that will impact your Credit Score.

How much is the cost of credit score to know if this is a logical idea?

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    The cost may be more than the impact to one's credit score. Are you assuming that one can give up the property and that settles the debt to the bank? Rules on that scenario vary by location. Could you please retag your question with an appropriate location? I imagine which state matters, too. Jun 20, 2013 at 17:15
  • Thanks Chris. I live in Florida but this property is in Puerto Rico.
    – Geo
    Jun 20, 2013 at 17:23
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    A 10% drop in price doesn't always mean "underwater." Is the place now worth less than the mortgage? Jun 20, 2013 at 20:07
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    In your question are you taking into account depreciation, and writing off the interest and other expenses? Jun 20, 2013 at 23:15

1 Answer 1

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(Ignoring any ethical considerations of defaulting on a mortgage obligation)

If your credit score fell, future costs of borrowing would be greater, if you could borrow money at all. The true financial cost of these penalties would depend on your own intentions and circumstances. The value of a credit score cannot be quantified in any absolute sense because of these circumstances which will vary from person to person.

Suppose a decision would result in your score falling from 700 to 600. As a result, a future car loan would cost something like 2% more in interest per year. Let's also suppose you would not be able to find a bank to give you money to buy a new home.

The difficulties caused by this situation would depend on the person. Some people have no intention of taking out another mortgage or buying another car, and to them, a lowered credit score might make no difference. To others, it would be desirable to avoid these penalties. The value of credit score would be equal to how much you would be willing to pay in the present to avoid these future penalties.

If you intend to borrow money in the near future, and somehow know how much more interest you will pay as a result of your lower score, then you could approximate the value of the credit drop by summing all of the additional interest costs discounted into the present. Something a little like this:

Year's Additional Cost in Interest / (1 + Your Personal Opportunity Cost of Funds) ^ (Years in the future this extra interest will be paid).

See time value of money explanation: Can you explain "time value of money" and "compound interest" and provide examples of each?

It could also be the case that you miss out on valuable financial opportunities as a result which could be added to the present value of the credit score drop.

For example, if the drop made you totally unable to purchase an investment property that would net you $10,000 in cash flows /year (which would yield cash flows immediately).

The value of that investment would have been

$10,000 / (1 + Your Personal Opportunity Cost of Funds).

Since you would not be able to make that investment (in this example) as a result of the decreased score, the present value of the investment would be an opportunity cost of the lower score.

There are other hard-to-quantify costs of low credit to consider as well, ranging from housing to employment to bragging rights.

Hopefully this has helped :)

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