DSCR Loans vs. Hard Money: Which is Right for Your Rental Property?
Compare DSCR (Debt Service Coverage Ratio) loans with hard money for rental property acquisitions and understand when to use each.
Dan McColl
Director of Construction Lending
DSCR Loans vs. Hard Money
When financing rental properties, investors often choose between DSCR (Debt Service Coverage Ratio) loans and hard money loans. Understanding the differences helps you pick the right tool for your situation.
What is a DSCR Loan?
A DSCR loan qualifies borrowers based on the property's rental income rather than personal income. The "debt service coverage ratio" compares property income to loan payments.
DSCR Formula:
DSCR = Net Operating Income ÷ Annual Debt Service
Example:
●Monthly rent: $3,500
●Annual NOI: $42,000 (after expenses)
●Annual debt payment: $36,000
●DSCR: 42,000 ÷ 36,000 = 1.17
Most DSCR lenders require 1.0-1.25 minimum DSCR.
Comparison at a Glance
| Factor | DSCR Loan | Hard Money |
|---|---|---|
| Term | 30 years | 6-24 months |
| Rate | 7-9% | 9-12% |
| Payments | Amortizing | Interest-only |
| Speed | 3-4 weeks | 1-2 weeks |
| Income verification | No | No |
| Property condition | Must be rentable | Any condition |
| LTV | Up to 80% | Up to 75% |
| Prepayment | Often 3-5 year penalty | Usually none |
When to Use Hard Money
Scenario 1: Property Needs Work
The property isn't rent-ready. DSCR loans require functioning, rentable properties. Hard money finances the acquisition AND renovation.
Scenario 2: Speed Required
You need to close in 7-10 days. DSCR loans take 3-4+ weeks minimum.
Scenario 3: Bridge to DSCR
You'll buy with hard money, stabilize, then refinance to DSCR for the long hold.
Scenario 4: Property Won't Cash Flow Initially
Low initial rents or high vacancy won't meet DSCR requirements. Hard money bridges to stabilization.
Scenario 5: Credit Issues
Recent foreclosure or bankruptcy? Hard money has more flexible credit requirements.
When to Use DSCR
Scenario 1: Turnkey Rental
Property is ready to rent, tenants in place, cash flowing. Go straight to DSCR.
Scenario 2: Long-Term Hold
You're buying and holding for years. DSCR's 30-year term and lower rate make sense.
Scenario 3: Multiple Properties
Scaling a rental portfolio? DSCR loans don't count against conventional loan limits.
Scenario 4: No Personal Income Documentation
Self-employed with complicated taxes? DSCR qualifies on property income, not yours.
The BRRRR Strategy Connection
Many investors use BOTH loan types:
1. Buy with hard money (speed, condition flexibility)
2. Rehab with hard money draws
3. Rent to stabilize property
4. Refinance to DSCR loan (lower rate, long term)
5. Repeat with recaptured capital
This strategy maximizes flexibility while minimizing long-term costs.
DSCR Loan Requirements
Property Requirements
●1-4 unit residential OR small multi-family
●Rentable condition
●Acceptable appraisal
●Market rents support DSCR
Borrower Requirements
●Credit score typically 660+
●Reserves (often 6-12 months)
●Entity or individual ownership
●Experience (helpful, not required)
Loan Terms Available
●30-year fixed
●ARM options (5/1, 7/1)
●Interest-only options
●Cash-out available
Hard Money to DSCR Transition
Planning Your Refinance
Timeline:
●Month 0: Close hard money, begin renovation
●Months 1-3: Complete renovation
●Months 3-4: Lease property
●Months 5-6: Apply for DSCR refinance
●Month 6-9: Close DSCR, pay off hard money
Requirements for Refinance:
●Property stabilized (rented)
●Appraisal supports value
●DSCR ratio met
●Seasoning requirement satisfied (often 3-6 months)
Example Numbers
Initial Acquisition (Hard Money):
●Purchase: $300,000
●Renovation: $50,000
●Total hard money: $262,500 (75% of $350K ARV)
●Interest rate: 11%
●Monthly payment: $2,406 (interest only)
Refinance (DSCR):
●Appraised value: $400,000 (value add!)
●DSCR loan: $300,000 (75% LTV)
●Cash out: $37,500 (recover some equity)
●Rate: 8%
●Monthly payment: $2,201 (amortizing)
●Monthly rent: $3,200
●DSCR: 1.25 (qualifies!)
Making the Right Choice
Choose Hard Money When:
●✅ Property needs work
●✅ You need to close quickly
●✅ Short-term hold planned
●✅ Property won't meet DSCR today
●✅ Creative deal structure needed
Choose DSCR When:
●✅ Property is rent-ready
●✅ Long-term hold planned
●✅ Cash flow already works
●✅ You want lowest cost of capital
●✅ No time pressure
The Bottom Line
Hard money and DSCR loans aren't competitors—they're complementary tools:
●Hard money gets you into deals quickly and finances renovation
●DSCR provides optimal long-term financing for stabilized rentals
The sophisticated rental investor uses both, matching the right tool to each phase of their investment.
