DSCR vs Conventional Loan: Which Gives Better Returns on a Rental

You found a rental property that cash flows on paper. Now you need to figure out how to finance it. Your two main options are a conventional loan or a DSCR loan, and the choice affects your returns more than most investors realize.

What Makes These Loans Different

Conventional loans qualify you based on your personal financial profile. The lender reviews your W-2s, tax returns, bank statements, and debt-to-income ratio. They want proof that you, as a borrower, can afford the payment regardless of what the property earns.

DSCR loans (Debt Service Coverage Ratio) flip this around. The lender qualifies the property, not you. If the rental income covers the mortgage payment by a sufficient margin (typically 1.0 to 1.25x), you get the loan. Your personal income barely matters.

This distinction seems minor until you try to scale past two or three properties.

The Rate Difference Is Real

DSCR loans carry higher interest rates. Depending on market conditions and your credit score, expect to pay 1% to 2% more than a comparable conventional loan. On a $200,000 loan, that's roughly $115 to $230 per month in additional interest at the higher rate.

Why the premium? DSCR lenders take on more risk. They can't verify your employment or see your full financial picture. They're betting entirely on the property's income stream. That risk gets priced into your rate.

I've seen DSCR rates range from 7.5% to 9.5% when conventional investment property rates sat around 6.5% to 7.5%. The spread varies by lender and how strong the DSCR ratio looks.

Qualification: Where DSCR Wins

Conventional lenders count each investment property mortgage against your debt-to-income ratio. After you own three or four rentals, qualifying for another conventional loan becomes difficult regardless of how well those properties perform.

Fannie Mae and Freddie Mac limit most borrowers to 10 financed properties total. Even getting to that limit requires jumping through hoops: higher reserves, lower LTVs, and more documentation with each additional property. The [Consumer Financial Protection Bureau](https://www.consumerfinance.gov/ask-cfpb/what-is-a-qualified-mortgage-en-1789/) outlines the ability-to-repay requirements that conventional lenders must follow.

DSCR loans sidestep all of this. Since qualification depends on the property, your personal DTI doesn't matter. You could own 15 rentals and still qualify for a DSCR loan if the new property's numbers work. Many DSCR lenders have no cap on the number of properties you can finance.

For W-2 employees buying their first or second rental, conventional usually makes sense. For self-employed investors or anyone scaling a portfolio, DSCR opens doors that conventional lending keeps closed.

Running the Numbers: Same Property, Two Loans

Let's compare the actual returns on a specific deal using each loan type.

The Property

Item	Amount
Purchase Price	$225,000
Down Payment (25%)	$56,250
Loan Amount	$168,750
Monthly Rent	$1,850
Property Tax (annual)	$2,700
Insurance (annual)	$1,400
Vacancy (5%)	$1,110/year
Maintenance (8%)	$1,776/year
Property Management (8%)	$1,776/year

Conventional Loan at 7.0%

> Monthly P&I: $1,123 > Monthly taxes + insurance: $342 > Total monthly payment: $1,465

Monthly cash flow before expenses: $1,850 - $1,465 = $385

Annual cash flow after vacancy, maintenance, and management: $385 × 12 = $4,620 Minus reserves: $1,110 + $1,776 + $1,776 = $4,662

Net annual cash flow: -$42

This property barely breaks even with a conventional loan. Your cash-on-cash return is effectively 0% on the $56,250 invested.

DSCR Loan at 8.5%

> Monthly P&I: $1,297 > Monthly taxes + insurance: $342 > Total monthly payment: $1,639

Monthly cash flow before expenses: $1,850 - $1,639 = $211

Annual cash flow after vacancy, maintenance, and management: $211 × 12 = $2,532 Minus reserves: $4,662

Net annual cash flow: -$2,130

With the DSCR loan, you're losing $177 per month. Your cash-on-cash return is -3.8%.

What This Tells You

On this specific property, the conventional loan is clearly better, assuming you can qualify. The 1.5% rate difference translates to $2,088 per year in additional interest ($174/month), which swings the deal from breakeven to negative.

But here's where the analysis gets interesting.

When DSCR Makes More Money Despite the Higher Rate

Cash flow isn't the only return on a rental property. You're also getting:

Principal paydown from tenants paying your mortgage

Appreciation as the property value increases

Tax benefits from depreciation and expense deductions

The conventional loan has $127/month going toward principal in year one. The DSCR loan has $103/month. Over 5 years, you'll build roughly $8,500 in equity with conventional versus $6,900 with DSCR.

If the property appreciates 3% annually, it's worth $261,000 after 5 years. That's $36,000 in appreciation regardless of which loan you chose.

Now consider this: with the DSCR loan, you might qualify to buy a second property while the conventional lender says no. Two properties appreciating at 3% gives you $72,000 in appreciation. Two properties building equity gives you $13,800 in principal paydown.

The higher rate on each individual property matters less than your ability to acquire more properties.

Calculating the DSCR Ratio

Before applying for a DSCR loan, you should know whether your deal qualifies. The formula is straightforward:

> DSCR = Annual Net Operating Income / Annual Debt Service

Or in monthly terms:

> DSCR = Monthly Rent / Monthly PITIA

PITIA means Principal, Interest, Taxes, Insurance, and Association dues (HOA). Most lenders want a DSCR of at least 1.0, meaning the rent exactly covers the payment. Many prefer 1.2 or higher.

For our example property with the DSCR loan:

> DSCR = $1,850 / $1,639 = 1.13

This would qualify with most DSCR lenders, though you might get a slightly better rate if the ratio were 1.25 or above.

The Hidden Costs of Each Loan Type

Conventional Loan Costs

Extensive documentation (2 years tax returns, W-2s, bank statements)

30-45 day average close time

Potentially rejected if DTI is too high

Reserves required (typically 6 months PITIA per property)

Property must meet Fannie/Freddie condition standards

DSCR Loan Costs

Higher interest rate (1-2% above conventional)

Higher origination points (often 1-3 points)

Prepayment penalties common (3-5 year terms)

Minimum loan amounts ($75,000-$100,000 at many lenders)

Appraisal must support rent estimate

The prepayment penalty deserves attention. Many DSCR loans charge you 3-5% of the loan balance if you sell or refinance within the first few years. On a $168,750 loan, that's up to $8,437 if you exit early. Conventional loans rarely have prepayment penalties.

Three Mistakes Investors Make With This Decision

Choosing Based on Rate Alone

I've seen investors pass on good deals because the only available financing was a DSCR loan at 8.5%. They wanted 7% or nothing. Meanwhile, the property would have returned 15% annually when you include appreciation and principal paydown. Fixating on rate while ignoring total return is a costly mistake.

Ignoring the Prepayment Penalty

A 5% prepayment penalty on a 5-year term means you're locked in. If rates drop 2% next year and you want to refinance, you'll pay $8,000+ for that privilege. If you're planning a BRRRR strategy where you refinance after stabilization, a DSCR loan with a prepay penalty might not work.

Not Shopping Multiple Lenders

DSCR loan pricing varies wildly between lenders. I've seen quotes on the same deal range from 7.75% to 9.25%. The difference between the best and worst DSCR lender can exceed the difference between DSCR and conventional. Get at least three quotes.

Which Loan Type Should You Choose?

Choose conventional if:

This is your first or second rental property

You have W-2 income that easily qualifies

Your DTI is under 43% including the new mortgage

You want the lowest possible rate

You might sell or refinance within 3 years

Choose DSCR if:

You own 3+ financed properties already

Your tax returns show low income (common for RE investors)

You're self-employed with complex income

Speed matters more than rate

You plan to hold long-term (5+ years)

Consider both if:

You qualify for conventional but it's tight

You're debating between two properties and can only get conventional on one

You want to preserve conventional borrowing capacity for a primary residence

Modeling Your Specific Deal

The example above showed conventional winning on a $225,000 property. But change a few variables and DSCR can come out ahead:

Higher rent ($2,100 instead of $1,850) improves cash flow enough to offset the rate difference

Lower purchase price means the rate spread costs less in absolute dollars

Faster appreciation makes the ability to buy more properties more valuable

Longer hold period dilutes the impact of higher origination costs

There's no universal answer. The right choice depends on your qualifying situation, the specific property, and your investment timeline.

You can model different scenarios using the [single-family rental calculator](/tools/single-family), which lets you adjust loan terms and see how they affect your cash-on-cash return and total return projections.

Running Your Own Analysis

Before you commit to either loan type, get actual quotes from lenders. The theoretical rate spreads I mentioned shift constantly. Your credit score, the property location, and the DSCR ratio all affect the actual rates you'll receive.

Get a conventional quote and a DSCR quote on the same property. Plug both into a calculator. Look at cash flow, total return over your expected hold period, and what each loan means for your ability to buy the next property.

The best loan is the one that maximizes your returns across your entire portfolio, not just on this single deal.