When you’re investing in rental properties, choosing the right loan can make all the difference in your cash flow and overall investment success. Let’s compare three different loan options. Theses include DSCR loans, traditional loans, and local bank loans. Therefore, understanding both the pros as well as the cons is vital to finding the best loan for your investment success! 

Traditional Loans: Pros and Cons

Pros:

1. 30-Year Mortgage Stability: Traditional loans offer the security of a 30-year mortgage. Therefore, they have predictable payments over a long period, which can help with long-term financial planning.
2. No Prepayment Penalty: Unlike some other loans, traditional loans usually don’t have prepayment penalties. You can sell or refinance your property without worrying about extra fees.
3. Lower Interest Rates: Generally, traditional loans come with lower interest rates compared to DSCR loans. As a result, this can significantly impact your cash flow, especially on larger loans.
4. Home Hacking Opportunities: If you’re buying a duplex, triplex, or fourplex, you can live in one of the units and qualify for an owner-occupied loan. This often means a lower down payment and a better interest rate.
5. Uniform Rules Across States: Traditional loans follow the same rules and guidelines across all 50 states. This makes them a consistent option no matter where your property is located.

Cons:

1. Income and Credit Requirements: In order to qualify, you need to prove your income and have good credit. This can be a hurdle for some investors.
2. Cannot Close in an LLC: Traditional loans require you to close in your personal name, not in an LLC. This can affect how you hold and protect your properties.
3. Limited to 10 Properties: You’re limited to financing 10 properties with traditional loans, which can be restrictive if you’re planning to build a large portfolio.
4. Seasoning Requirement for Cash-Out Refinances: If you want to cash out, you must wait one year after your last refinance or purchase.

DSCR Loans: Pros and Cons

Pros:

1. Flexibility: DSCR loans are incredibly flexible. Therefore, they can be used for single-family homes, fourplexes, and even larger properties. They’re also great for unique properties like VRBOs, non-warrantable condos, as well as mixed-use properties.
2. Ease of Qualification: You don’t need to prove your personal income or employment status. The loan is based on the cash flow of the rental property itself.
3. Close in an LLC: DSCR loans allow you to buy and refinance properties under an LLC, offering better protection for your investments.
4. No Limit on the Number of Properties: Unlike traditional loans, many DSCR lenders don’t limit the number of properties you can finance.
5. Available in All States: While guidelines may vary slightly, DSCR loans are available across all 50 states.

Cons:

1. Prepayment Penalties: DSCR loans often come with prepayment penalties, which can be costly if you plan to sell or refinance within the first few years.
2. Higher Interest Rates: Interest rates on DSCR loans are typically higher than traditional loans, which can impact your cash flow, especially on larger loan amounts.
3. Market Sensitivity: DSCR loans can be more sensitive to market changes. During uncertain times, these loans might disappear or change rapidly, which can be risky for investors.

Local Bank Loans: Pros and Cons

Pros:

1. In-House Products: Local banks often offer in-house loans, which they fund, service, and keep. These loans usually come with shorter terms, like three, five, or seven years. There are also options to refinance or adjust afterward.
2. Flexibility: Local banks are known for their flexibility. They may finance unique properties or smaller loans that larger lenders won’t touch. Therefore, this makes them a great option for small towns and rural properties.
3. No Prepayment Penalties: Like traditional loans, many local bank loans don’t have prepayment penalties, giving you the freedom to refinance or sell without extra costs.
4. Favorable Terms for Small Loans: Local banks often prefer smaller loans, which can be a perfect fit for lower-priced properties in smaller markets.

Cons:

1. Varied Rules: Each local bank sets its own rules, which means you have to shop around to find the right fit. This can be time-consuming.
2. Lending Limits: Local banks may have lending limits, which can be a barrier if you’re trying to finance multiple properties or larger portfolios.
3. Geographic Limitations: Local banks tend to lend within specific regions or markets. If your property is outside their footprint, you might not qualify.
4. Callable Loans: Some local bank loans are callable, meaning the bank can demand full repayment before the end of the term if market conditions change.

Conclusion: Choose the Right Loan for Your Situation

Each of these loan types—DSCR, traditional, and local bank loans—has its own strengths and weaknesses. The best choice depends on your current situation, investment goals, and the specific property you’re financing. When you compare different loan options you can maximize your cash flow and protect your investments.

Remember, it’s all about finding the right fit for each property and stage in your investment career. Whether you’re just starting out or adding to your portfolio, there’s a loan that can help you achieve your goals. Compare different loan options today to set yourself up for a successful future!