DSCR vs. Conventional Loans for a California Rental: Which Works Better?
In this Sacramento-area rental example, conventional financing takes less cash to close. The DSCR option qualifies based on the property’s rent relative to its payment, but it takes a larger down payment under the terms we modeled. Both options show negative monthly cash flow once we budget for operating expenses.
Same rental, two financing options
Say you’re buying a $560,000 rental that brings in $3,000 a month. With conventional financing at 25% down, the estimated cash to close is about $151,000. With the modeled DSCR loan at 48% down, it’s about $283,000. That larger down payment brings the qualifying ratio to 1.01 in this example. Both cash-to-close estimates exclude reserves.
How does each loan qualify?
Conventional financing generally looks at the borrower’s income and debts and may count a portion of the rental income under program guidelines. A DSCR loan generally compares the property’s qualifying rent with the payment used by the lender. Minimum ratios, reserve requirements and available terms vary by program.
What does the property actually cash flow?
In this example, I set aside 23% of rent for vacancy, repairs, major replacements and management. That leaves $2,310 a month before the property payment. After that payment, the conventional option runs about $1,436 short each month, and the DSCR option runs about $666 short.
The DSCR option reduces the monthly shortfall here, but it also ties up about $132,000 more at closing. Before you make an offer, compare both loans using the property’s expected rent, tax and insurance estimates, and a realistic operating budget. Then decide whether the deal makes sense for the amount of cash you’d put into it.
Explore California DSCR financing:
This is an illustrative scenario. Actual loan terms, qualifying requirements and operating costs vary.
About Michael Belfor
Michael Belfor is a Branch Manager – Loan Originator at American Pacific Mortgage with approximately 24 years of mortgage experience. APM President’s Club and Top 1% since 2017. MLO NMLS 264700 | Company NMLS 1850 | DRE 01878769
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