Investing

Investment Property Financing

How to finance rental properties and investment real estate, including DSCR loans, conventional options, and portfolio strategies.

NMHL Team2026-01-0412 min read

Investment Property Financing Overview

Financing investment properties differs significantly from financing a primary residence. Lenders view investment properties as higher risk because borrowers are statistically more likely to default on investment property loans during financial hardship. As a result, investment property loans typically require larger down payments of 15-25%, carry higher interest rates by 0.5-1% compared to primary residence loans, have stricter credit score requirements, and require greater cash reserves. Understanding these differences helps you prepare properly and choose the right financing strategy for your investment goals.

Despite higher costs, real estate remains one of the most powerful wealth-building tools available, with rental properties providing both monthly cash flow and long-term appreciation.

Loan Types for Investment Properties

Several loan types are available for investment properties. Conventional loans allow up to 10 financed properties with 15-25% down and competitive rates for borrowers with strong credit. DSCR loans qualify you based on the property's rental income rather than your personal income, making them ideal for investors who are self-employed or own multiple properties. Portfolio loans are held by the originating bank and may offer more flexible terms. Hard money loans provide fast financing for fix-and-flip projects but carry higher rates. Commercial loans are used for properties with 5 or more units. Each option serves different investment strategies and borrower profiles.

Key Tips

Start with conventional loans for your first 1-4 investment properties for the best rates
DSCR loans are ideal when you have maxed out conventional loan slots or need faster closings
Consider portfolio loans for unique properties that do not fit conventional guidelines

DSCR Loans Explained

DSCR (Debt Service Coverage Ratio) loans are specifically designed for real estate investors. Instead of qualifying based on your personal income and tax returns, DSCR loans qualify based on the property's ability to generate rental income that covers the mortgage payment. The DSCR is calculated by dividing the property's monthly rental income by the total monthly mortgage payment (including principal, interest, taxes, insurance, and HOA). A DSCR of 1.0 means the rent exactly covers the payment. Most lenders require a minimum DSCR of 1.0-1.25. These loans typically require 20-25% down, a credit score of 640 or higher, and offer 30-year fixed or adjustable rate terms.

DSCR loans allow investors to scale their portfolios without the income documentation requirements that limit conventional lending. If the property cash flows, you can qualify.

Building a Rental Portfolio

Building a successful rental portfolio requires strategic financing planning. Start with conventional loans for your first properties to take advantage of the best rates and terms. As you accumulate properties, transition to DSCR loans to continue scaling without income documentation constraints. Consider the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) to recycle your capital across multiple properties. Maintain strong cash reserves of at least 6 months of payments per property. Work with a lender who understands investment property financing and can help you create a financing plan that supports your long-term portfolio growth goals.

Key Tips

Keep detailed records of rental income and expenses for each property
Build relationships with property managers and contractors to support portfolio growth
Diversify across property types and locations to reduce risk

Tax Benefits of Investment Properties

Investment properties offer significant tax benefits. Mortgage interest on investment properties is fully deductible against rental income. Depreciation allows you to deduct a portion of the property's value each year, reducing your taxable income even if the property is appreciating. Operating expenses including property management fees, repairs, insurance, and property taxes are deductible. The 1031 exchange allows you to defer capital gains taxes when selling one investment property and purchasing another. These tax benefits can make real estate investing significantly more profitable than the cash flow alone would suggest. Always consult a tax professional for personalized advice.

Depreciation deductions can offset rental income, potentially creating a tax loss on paper even while the property generates positive cash flow.

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Frequently Asked Questions

How much down payment do I need for an investment property?

Conventional investment property loans require 15-25% down depending on the number of units and your credit score. DSCR loans typically require 20-25%. Single-family properties may qualify for 15% down with strong credit, while multi-family properties usually need 20-25% down.

Can I use rental income to qualify for the loan?

For conventional loans, lenders typically count 75% of documented rental income toward your qualifying income. DSCR loans use the full rental income compared to the mortgage payment. Having existing rental income from the property through a lease agreement strengthens your application.

How many investment properties can I finance?

Conventional guidelines allow up to 10 financed properties total. DSCR loans have no limit on the number of financed properties. Portfolio and commercial lenders may also offer more flexibility. Working with NMHL gives you access to multiple financing options as your portfolio grows.

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