Key Takeaways
- DSCR Loans Eliminate Personal Income Requirements: DSCR rental loans qualify borrowers based on a property’s debt-service coverage ratio (NOI divided by mortgage payment) rather than personal income, with ABL requiring a minimum 1.0 DSCR and making them ideal for self-employed investors or those who’ve maxed out debt-to-income ratios.
- Bridge Loans Enable Quick Acquisitions: Short-term bridge loans with 12-24-month terms allow investors to secure properties immediately before they leave the market, then refinance into long-term DSCR or conventional financing after closing.
- APR Comparison Reveals True Borrowing Costs: Annual Percentage Rate (APR) includes interest plus origination fees and closing costs spread over the loan’s life, enabling accurate apples-to-apples comparisons between different financing options beyond just interest rates.
- Pre-Qualification and Cash Reserves Are Essential: Loan pre-qualification based on self-reported financials demonstrates buyer seriousness and clarifies purchase budgets, while maintaining 3-6 months of property expenses in cash reserves protects against vacancies and satisfies most lender requirements.
Buying your first rental property can help you build lasting wealth, but your financing choice matters just as much as the property itself. Navigating financing for rental properties can feel overwhelming for first-time investors, yet the right loan can turn a mediocre deal into a cash-flowing machine, while the wrong one can sink an otherwise solid investment.
With ABL, you can secure reliable financing tailored to your specific needs. Whether you’re acquiring a turnkey rental or finishing up a BRRRR project, we have a loan program for you.
What to Look for In a Rental Property Loan
When choosing a financing option for your first rental property, look for the following:
Committed Lender
Choose a lender who won’t disappear after closing but offers full support throughout the life of the loan. They should be a true partner committed to helping you manage your investment.
Flexible Terms
The terms of your rental loan should be tailored to your property and situation. This includes the loan term, amortization schedule, fee structure, etc.
Competitive Rates
The lower your loan’s interest rate, the lower your total loan costs and the higher your returns. Shop around to ensure you get a loan with a competitive rate.
Financing Options for Your First Rental Property Investment
Now that you know what to look for in your first rental property loan, here are some popular options to consider:
Conventional Mortgages
Conventional mortgages are issued by traditional lenders and often conform to lending standards set by Freddie Mac and Fannie Mae. As a result, they tend to have strict down payment, credit, income, and reserve requirements.
While widely available, conventional mortgages may not be the best option if you have irregular income or you’ve already maxed out your debt-to-income (DTI) ratio.
DSCR Rental Loans
DSCR rental loans are mortgages qualified based on their debt-service coverage ratio (DSCR). Simply put, this is a property’s ability to cover its mortgage payments with its net operating income (NOI). The higher the DSCR, the more likely the loan is to be approved (regardless of personal income).
For example, let’s say a property generates $1,500 in monthly net operating income (NOI). A loan with a monthly payment of $1,200 would result in a DSCR of 1.25 ($1,500 / $1,200). At ABL, we offer DSCR loans with a minimum DSCR requirement of 1.0.
Bridge Loans
Imagine you find the perfect rental property, but you’re afraid it will be off the market before you can secure long-term financing. Enter bridge loans. These are short-term mortgages designed to bridge the gap between when you buy a property and sell or refinance it.
At ABL, we offer flexible bridge loans with 12-24-month terms to help you seize deals quickly. From there, you can refinance into one of our DSCR rental loans or another long-term loan.
Private Loans
If you can’t secure a traditional loan, consider a private loan. This is a loan issued by a private individual, such as a family member or friend. Since individuals aren’t subject to the same lending standards as banks, they may offer more flexible loan terms. However, if the investment goes south and you miss payments or default on the loan, it could also sour relationships.
Seller Financing
Seller financing is a subset of private loans where the seller acts as your lender, collecting monthly payments until the property is paid off. You’ll likely need to propose this arrangement yourself, positioning it as a win-win that eliminates intermediary fees for both parties.
Government-Backed Loans
Government-backed loans are mortgages guaranteed by the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), or Department of Veterans Affairs (VA).
While these loans tend to have more favorable terms than conventional loans, they’re geared toward primary residences, not rental property. The only exception is using an FHA or VA loan to finance a property with up to four units (the borrower must still live in one of the units).
5 Tips for Financing Your First Rental Property
However you choose to finance your first rental property, follow these best practices. These tips apply across all financing for rental properties options and will help ensure your investment success regardless of which loan type you select:
Know What Lenders Look For in a Borrower
Traditional lenders scrutinize your credit score, debt-to-income (DTI) ratio, employment history, and tax returns. By contrast, DSCR lenders focus on the property’s income potential and whether it can cover the mortgage payments, making them ideal for self-employed investors.
Have a Clear Exit Strategy
Before securing financing, determine whether you plan to hold the property long-term, refinance within a few years, or sell for a profit. Your exit strategy will help inform acceptable loan options and terms (e.g., short- vs. long-term loans and fixed vs. adjustable rates).
Compare Annual Percentage Rates (APRs) of Different Loan Options
A loan’s APR reflects the full cost of borrowing by including not just interest but origination fees (points) and other closing costs spread over the loan’s life. By focusing on APR, you can make apples-to-apples comparisons between different loan options.
Maintain a Cash Reserve for Unexpected Expenses
Maintain a cash reserve of 3-6 months of property expenses (mortgage, taxes, maintenance, insurance, etc.). This can protect you from financial strain during vacancies, emergency repairs, and market downturns. Plus, many lenders require proof of reserves to approve a loan anyway.
Get Pre-Qualified for a Loan Before You Start Shopping
Loan pre-qualification is a preliminary loan approval based on your self-reported financial information. It helps you better understand your purchase budget and shows sellers you’re serious about buying, giving you a competitive edge over non-approved buyers.
Buy Your First Rental Property With a DSCR Loan from ABL
Financing your first rental property doesn’t have to mean jumping through hoops with traditional lenders. ABL’s DSCR loans are designed specifically for real estate investors like you, with streamlined approval based on your property income potential.
Whether you’re self-employed or simply want a faster path to closing, our local team provides the expertise and support you need to make your first rental investment a success. Take the first step by pre-qualifying for an ABL DSCR loan today!