How to Finance Investment Properties: DSCR, Hard Money & Portfolio Loans
Master investment property financing with comprehensive coverage of DSCR loans, hard money lending, portfolio lenders, and creative financing strategies for building your real estate portfolio.
💰 Financing Options Expand Opportunities
Understanding various financing options allows investors to acquire more properties with less personal capital while optimizing cash flow and tax benefits through strategic leverage.
Investment Property Loan Types
Primary Financing Options
DSCR Loans (Debt Service Coverage Ratio)
Qualification based on property cash flow, not personal income. Ideal for investors with multiple properties.
Key Features:
- • No income documentation required
- • 75-80% LTV typical
- • 20-25% down payment
- • 30-year amortization available
- • Rates: 7-10% APR (2024)
Requirements:
- • DSCR ratio 1.00-1.25 minimum
- • 6-12 month reserves required
- • 740+ credit score preferred
- • Lease agreements or rent rolls
- • Property appraisal and inspection
Hard Money Loans
Short-term, asset-based financing for quick acquisitions and rehab projects. Fast funding but higher costs.
Key Features:
- • 65-80% LTV based on ARV
- • 6-24 month terms typical
- • Rates: 8-15% APR + points
- • 1-4 week funding timeline
- • Interest-only payments common
Best For:
- • Fix-and-flip projects
- • BRRRR strategy initial purchase
- • Quick competitive offers
- • Bridge financing needs
- • Distressed property acquisitions
Portfolio Lenders
Banks and credit unions that keep loans in-house, offering more flexible underwriting for investors.
Advantages:
- • Flexible underwriting guidelines
- • Relationship-based lending
- • Can finance multiple properties
- • Competitive rates for good clients
- • Local market knowledge
Typical Terms:
- • 75-80% LTV on investment properties
- • 20-25% down payment required
- • 15-30 year amortization
- • May require business relationship
- • Often adjustable rate mortgages
DSCR Calculation & Requirements
Understanding Debt Service Coverage Ratio
DSCR Formula
DSCR = Net Operating Income (NOI) ÷ Total Debt Service
Where:
• NOI = Gross Rental Income - Operating Expenses
• Total Debt Service = Annual mortgage payments (P&I)
• Ratio above 1.25 is considered strong
DSCR Calculation Example
Property Income & Expenses:
Loan Details:
Creative Financing Strategies
Alternative Financing Methods
Private Money Lending
Individual investors providing capital for real estate deals. Often more flexible than institutional lenders.
- • Rates typically 6-12% depending on relationship and risk
- • Terms negotiable (often 1-5 years)
- • Can fund purchase and rehab costs
- • Faster approval and funding process
- • May accept lower credit scores or income documentation
Seller Financing
Owner acts as bank, accepting payments over time instead of full cash at closing.
- • No traditional loan qualification required
- • Negotiable down payment (often 10-20%)
- • Interest rates below market possible
- • Faster closing process
- • Best with motivated sellers (retirement, estate sales)
Subject To Acquisitions
⚠️ Advanced Strategy: Taking ownership while leaving existing mortgage in place. Legal and ethical considerations apply.
- • Requires sophisticated legal documentation
- • Due-on-sale clause risk
- • Best for distressed situations
- • Requires insurance and liability management
- • Consult real estate attorney before proceeding
Loan Application Process
Step-by-Step Application
Pre-Qualification & Lender Research
Shop multiple lenders to compare terms and find the best fit for your investment strategy.
- • Research local portfolio lenders and credit unions
- • Compare DSCR lenders for investor-friendly terms
- • Get pre-qualification letters for serious offers
- • Understand each lender's specific requirements
Documentation Preparation
Organize comprehensive financial documentation for smooth underwriting process.
- • Personal financial statements and tax returns (2 years)
- • Bank statements and asset documentation
- • Existing property rent rolls and lease agreements
- • Insurance declarations pages
- • Purchase contract and property details
Property Analysis & Underwriting
Lender evaluates property cash flow potential and borrower qualification.
- • Property appraisal and inspection
- • Rental market analysis and income verification
- • Title search and insurance
- • Final underwriting and approval
Closing & Funding
Final document review, wire transfers, and property transfer completion.
- • Final walkthrough and condition verification
- • Closing disclosure review
- • Wire transfer coordination for down payment
- • Document signing and key transfer
Frequently Asked Questions
What is the minimum DSCR ratio lenders require?
Most DSCR lenders require a minimum ratio of 1.00-1.25, meaning the property's net operating income covers 100-125% of the mortgage payment. Higher ratios get better rates.
How much down payment is required for investment properties?
Conventional loans typically require 20-25% down for investment properties. Hard money and private lenders may accept 10-20% down but at higher interest rates.
Can I use rental income to qualify for investment property loans?
Yes, with DSCR loans and some portfolio lenders. They use the property's rental income rather than your personal income for qualification, making them ideal for investors.
🎯 Key Takeaways
- • DSCR loans enable qualification based on property cash flow, not personal income
- • Hard money provides speed but at higher costs—ideal for competitive markets
- • Build relationships with portfolio lenders for flexible, long-term partnerships
- • Maintain strong credit and cash reserves for best loan terms
- • Consider creative financing when traditional loans don't fit the deal