Private Lending vs DSCR Loans: Which One Works for Your Investment?

When investing in real estate, one of the biggest decisions you’ll make is how to fund your investment. Two popular options are private lending and DSCR loans.

Understanding these two types of loans will help you make an informed decision and choose the one that’s right for you. In this post we’ll compare private lending and DSCR loans, the differences, advantages and what to consider when choosing a loan for your next investment.

At Keyswag Lending we're here to help you through the proccess and keep you informed every step of the way.

What Is Private Lending?

Private lending is financing from individuals or non-institutional lenders not banks. Private lenders offer hard money loans or other flexible loan products to real estate investors. One of the biggest benefits of private lending is speed—these loans have a faster approval process than traditional loans.

Private money lenders don’t require strict credit scores or extensive documentation, making them perfect for investors looking for short term financing or those with unique situations.

When looking into private lending you need to understand the terms, interest rates, repayment schedules and any penalties. Rates are higher than traditional loans because of the risk involved but this is balanced by the flexibility and access to capital. If you’re looking for hard money/bridge loans for a fix and flip or investment property financing private lenders are the way to go.

What Are DSCR Loans?

DSCR loans, or Debt Service Coverage Ratio loans, are a type of financing for income producing properties. These loans evaluate your property’s ability to produce income to qualify you. The DSCR is a ratio used to compare your property’s income to its debt obligations. Lenders use this ratio to determine the risk of lending you money.

If your property generates enough cash flow to cover its debt obligations (DSCR greater than 1) you can qualify for a DSCR loan. This type of financing is perfect for real estate investors looking for long term investments such as rental properties or commercial real estate. Compared to private lending DSCR loans have better interest rates and loan terms because they’re based on your investment property’s performance not your personal creditworthiness.

Private Lending vs DSCR Loans

Understanding the differences between private lending and DSCR loans will help you choose the right financing for your real estate investments. Here’s the breakdown:

• Eligibility Requirements: Private lending has fewer requirements as lenders focus on the property and deal itself not your credit score. DSCR loans require proof of income and a higher DSCR to ensure the property’s income can cover its debt obligations.
• Interest Rates: Private lending rates are higher 7-12% due to the risk involved. DSCR loans have lower rates 5-7% because they’re based on the property’s performance.
• Loan Amounts: Private lenders lend up to 70-80% of the property’s value, DSCR loans can lend up to 85% loan to value (LTV) if the property has strong cash flow.
• Loan Terms: Private loans have shorter terms 12-36 months, DSCR loans have longer repayment schedules 5-30 years making them perfect for long term investments.
• Risk Factors: Private lending is more flexible but comes with higher rates and more risk. DSCR loans being tied to property income provides more security for the lender which means lower rates and more predictable terms.

Now that you understand the differences choose the right loan for your investment strategy.

Choosing the Right Loan for Your Investment

Choosing between private lending and DSCR loans depends on your investment strategy. If you’re looking for quick access to capital for a fix and flip or another short term project private lending might be the way to go. These loans allow you to move fast without waiting for the long approval process that comes with traditional financing.

When selecting the right loan for your investment, it's crucial to use tools like a loan calculator, mortgage calculator, and fix-and-flip calculator to assess your potential costs and returns. These calculators allow you to estimate your monthly payments, interest rates, and overall loan affordability, helping you determine whether a private lending or DSCR loan is the best option for your project.

But if you’re focused on long term investments such as rental properties or commercial real estate a DSCR loan might be more beneficial. The lower rates combined with the longer terms will ensure your investment is profitable over time.Consider your property type, cash flow expectations and project timeline before making a decision.

Private Lending Pros and Cons

Private lending has its advantages for real estate investors including fast approvals, flexible terms and fewer qualifications. But the trade off is higher interest rates and shorter loan terms. These loans are perfect for flipping houses or funding other short term projects that require immediate capital.

On the downside the higher interest rates of hard money loans can eat into your profits especially if the property doesn’t sell or rent as quickly as expected. Investors also need to consider loan to value ratios and make sure the property’s sale or rental income will cover the loan payments.

DSCR Loans Pros and Cons

DSCR loans offer lower interest rates and longer terms making them perfect for investors looking to hold onto properties long term. These loans are based on the property’s cash flow making them good for income producing properties. If your property generates steady income you may qualify for higher loan amounts and more favorable repayment schedules.

But DSCR loans are not for short term projects or properties with inconsistent cash flow. The application process is more involved requiring detailed financial documentation and proof of the property’s income potential.

Conclusion

When deciding between private lending and DSCR loans consider your investment goals, project timeline and property types. If you need fast access to capital for a short term project private lending might be the way to go. But if you’re looking for long term financing with lower interest rates a DSCR loan could be more suitable.

At Keyswag Lending we offer a range of financing options to fit your needs. Whether you’re in Sacramento, Riverside or Seattle our team is here to help you navigate the loan process and find the right financing solution for your real estate investments -just contact us today, we'll take care of the rest.