Cap rate (capitalization rate) is net operating income divided by purchase price. It tells you the unleveraged return a property generates. A $300,000 property producing $18,000 NOI has a 6% cap rate. It's the most common metric for comparing rental properties because it strips out financing and gives you an apples-to-apples comparison.

What is a good cap rate for rental property?

For residential rentals, 5-8% is generally considered solid. Above 8% is excellent but often comes with higher risk (rougher neighborhoods, older buildings, declining markets). Below 5% is common in expensive metros where investors rely more on appreciation than cash flow.

How is cap rate different from cash-on-cash return?

Cap rate ignores financing — it measures the property's return as if you paid all cash. Cash-on-cash return measures your actual return on the cash you invested, factoring in your mortgage. A property with a 6% cap rate could yield a 12% cash-on-cash return with leverage.

What is the 1% rule in real estate?

The 1% rule says monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/month. It's a quick screening tool — many successful rentals don't pass the 1% rule, especially in higher-priced markets.

What is the BRRRR strategy?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. You buy a distressed property below market value, renovate it, rent it out, then do a cash-out refinance based on the new appraised value to pull out most or all of your original capital and repeat the process.

Where does CapRateCity get its data?

Our city-level data draws from publicly available sources including U.S. Census Bureau population and income figures, Zillow Home Value Index for median prices, HUD Fair Market Rents, and state/county tax assessor records. Data is updated periodically.

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Conventional vs DSCR Loans: Which Investment Property Loan Is Right?

Two of the most common ways to finance a rental property. Here's how they compare on rate, qualification, down payment, and the kind of investor each one fits.

By NumbersLab · 9 min read

If you are buying a rental property in 2026, the decision between a conventional investment property loan and a DSCR loan is usually the first big financing fork in the road. Both can put you into the same property — but the qualification process, the rate you pay, and the kind of investor each one rewards are very different.

The short version: conventional loans look at you, DSCR loans look at the property. The longer version is where the nuance lives, and where the wrong choice can cost you tens of thousands of dollars over the life of a loan.

Qualification: W-2 Income vs Property Income

Conventional investment property loans are underwritten to Fannie Mae or Freddie Mac guidelines. That means full income documentation: two years of W-2s or 1099s, two years of tax returns including Schedule E for any existing rental properties, recent pay stubs, and asset statements. The lender calculates a debt-to-income ratio and confirms you can make the payment even if the property sits empty.

DSCR loans skip personal income entirely. The lender pulls credit, verifies the down payment is sourced and seasoned, and orders an appraisal with a rent schedule (the 1007 form). If the property's projected rent covers the mortgage payment by enough margin, the loan funds. We cover the math behind that ratio in our full DSCR loan guide.

Key difference: A self-employed investor showing $40,000 in taxable income but earning $200,000 in actual cash flow may not qualify for a conventional loan past property #2 or #3. The same investor can buy unlimited properties on DSCR financing as long as each deal pencils.

Interest Rates

This is the most predictable difference. DSCR rates run roughly 0.75% to 1.5% above conventional investment property rates. If conventional investment loans are pricing at 7.25%, expect DSCR rates between 8.0% and 8.75%. The premium covers the lender's added risk from skipping income verification.

On a $200,000 loan, a 1% rate difference equals about $130 a month in payment, or roughly $1,560 a year. Over 30 years that is more than $46,000 in extra interest if you held the loan to term. Most investors do not — but the cash flow drag is real every single month.

Run the actual payment difference using the calculators at mortgagemathlab.com before you commit to either path.

Down Payment

Both products typically require 20% to 25% down on a single-family rental. Conventional loans technically allow 15% down on a one-unit investment property in some scenarios, but most investors put 20% to 25% to avoid mortgage insurance and to keep DTI manageable. DSCR loans almost always want 20% minimum, with 25% being standard and 30% required when the DSCR ratio is marginal.

For a 2-4 unit property, conventional loans usually require 25% down. DSCR lenders often match that, occasionally allowing 20% with stronger ratios.

Reserves

Reserves are the cash you must show after closing. Conventional loans typically require 6 months of PITI (principal, interest, taxes, insurance) on the subject property, plus 2 months on each existing financed rental. Investors with 4+ properties can see reserve requirements stack up to six figures.

DSCR loans usually want 3 to 6 months of PITI on the subject property and ignore your other rentals. That difference can be the deciding factor for an investor whose capital is tied up in other deals.

Maximum Number of Loans

Fannie Mae caps conventional financing at 10 financed properties per borrower. Some lenders cut off at 4 because they only sell to Fannie 4-property guidelines. Once you hit the cap, you cannot get another conventional investment loan in your name — period.

DSCR loans have no per-borrower cap. If the property qualifies, you get the loan. This is the single biggest reason serious investors transition from conventional to DSCR somewhere between deals 5 and 10.

Prepayment Penalties

Conventional loans never carry prepayment penalties. You can refinance, sell, or pay off early with no fee.

Most DSCR loans include a prepayment penalty — typically a 5/4/3/2/1 step-down (5% of balance year one, 4% year two, etc.) or a 3-year flat penalty. Some lenders offer no-prepay options at a slightly higher rate, usually 0.25% to 0.50% more. If you are running a BRRRR strategy and plan to refinance within 12 to 24 months, the no-prepay option almost always wins.

3% prepay × $150,000 loan = $4,500 — pay this once and the rate-buy-down was free

Closing Speed

Conventional loans take 30 to 45 days to close. DSCR loans often close in 18 to 25 days because there is far less documentation to chase. In a competitive market or on a deal where speed matters, that gap can be the difference between winning and losing.

Who Each Loan Is Best For

Conventional fits you if

You have stable W-2 income that supports the payment on paper. You have fewer than 4 financed rental properties. You want the lowest possible rate. You may pay off or refinance early and want flexibility. You qualify on income without needing rental income from the new property to count.

DSCR fits you if

You are self-employed, run multiple LLCs, or use legal deductions that crush taxable income. You already have 4+ financed properties. You want to scale fast without the conventional cap. You value closing speed. The property cash flows strongly enough that the higher rate still works.

A Side-by-Side Example

Same property, same investor, two different loans. $250,000 purchase, 25% down ($62,500), $187,500 loan, projected rent $2,100, taxes/insurance/maintenance $700/mo, NOI $16,800/year.

Conventional at 7.25%: payment $1,279/mo, annual debt service $15,348, cash flow $121/mo after expenses, total monthly out-the-door including reserves and DTI considerations.

DSCR at 8.25%: payment $1,408/mo, annual debt service $16,896, cash flow about negative $8/mo at these expenses. DSCR ratio: $16,800 / $16,896 = 0.99 — most lenders would push you to put 30% down to get the ratio above 1.0.

Same deal, two completely different stories. The conventional loan cash flows; the DSCR loan barely breaks even and might require more down. This is why the analysis matters before you choose. Pull rent comps using our market data tools to make sure the projected rent is realistic.

Compare both loans on a real deal →

The Hybrid Approach

Most investors do not pick one and stick with it forever. They use conventional loans for their first 3 to 4 properties to lock in the lowest rates, then switch to DSCR loans once their tax returns or property count makes conventional impossible. This sequencing maximizes lifetime borrowing capacity and minimizes interest paid.

If you are also weighing tax implications of a higher-rate loan, the deductibility analysis at takehometax.com can show you the after-tax cost of each option.

Bottom line: Conventional loans are cheaper but harder to qualify for and capped at 10. DSCR loans are more expensive but qualify on the deal itself and have no cap. The right answer is usually conventional first, DSCR later — but always run the math both ways before you sign.

Model cash-on-cash for both loan types →

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