5 Ways to Finance Rental Properties in California

Financing rental properties is different from financing your primary home. Higher rates. Bigger down payments. Stricter qualification.

But smart investors use 5 financing strategies depending on their situation.

I'm Bill McCoy—California mortgage broker and rental property owner (CA DRE #01212512). Here's what works.

1. Conventional investment loans

What it is: Traditional Fannie Mae/Freddie Mac loan for investment properties.

Down payment: 15-25%

• 1-unit: 15% minimum
• 2-4 units: 25% minimum

Credit score: 680+ (720+ for best rates)

Interest rate: 0.5-0.75% higher than primary residence
2026 example: 6.75-7.25%

Max properties: 10 financed total (including your primary)

Pros:

• Lowest rates of all investment options
• Widely available
• Can use rental income to offset payment (with 2-year history)

Cons:

• Requires W-2 income verification
• 25% down on multi-family
• DTI limits (43% max)
• Counts against personal debt ratio

Best for: W-2 employees buying 1-4 unit rentals with traditional income docs.

2. DSCR loans

What it is: Loan based on the property's rental income, not your personal income.

How it works:
DSCR = (Monthly Rent) ÷ (Monthly PITIA)

Minimum DSCR: 1.0 to 1.25

Example:

• Rent: $3,500/month
• Payment (PITIA): $2,800/month
• DSCR: 1.25 ✓

Down payment: 20-25%

Credit score: 660+ (700+ for best rates)

Interest rate: 7.0-8.0% (higher than conventional)

Max properties: Unlimited (some lenders cap at 10)

Pros:

• No income verification (no W-2s, paystubs, tax returns)
• Perfect for self-employed investors
• Doesn't count against personal DTI
• Unlimited properties

Cons:

• Higher rates
• Larger down payment
• Property must cash flow strongly

Best for: Self-employed investors, buyers with multiple properties, anyone who doesn't want to verify personal income.

Learn more about DSCR loans

3. Portfolio loans

What it is: Loans held by the bank instead of sold to Fannie/Freddie.

How it works: Bank sets its own rules. More flexible underwriting.

Down payment: 20-30%

Credit score: 680+

Interest rate: 7.0-8.5%

Pros:

• Flexible underwriting
• Can work with complex income
• Multiple properties easier
• May allow unique property types

Cons:

• Higher rates
• Harder to find
• Fewer lenders offer them
• May have prepayment penalties

Best for: Investors with complex situations that don't fit conventional or DSCR guidelines.

4. Hard money / bridge loans

What it is: Short-term loan (6-24 months) from private lenders based primarily on property value.

Down payment: 10-30%

Interest rate: 9-12%+

Loan term: 6-24 months

Pros:

• Fast approval (days, not weeks)
• Minimal credit/income requirements
• Can finance rehab costs
• Works for properties needing major work

Cons:

• Very high rates
• High fees (3-5 points)
• Short term (must refinance or sell)
• Not for long-term holding

Best for: Fix-and-flip, BRRRR strategy, properties needing rehab, bridge financing until you can get conventional.

5. HELOC on existing property

What it is: Line of credit against equity in another property (usually your primary home).

Access: Up to 80-90% of home value minus existing mortgage

Interest rate: Variable, typically 7-9% in 2026

Repayment: Interest-only during draw period, then principal + interest

Pros:

• Fast access to cash
• No need to refinance existing mortgage
• Pay interest only on what you use
• Can use for down payment + rehab

Cons:

• Variable rate (can increase)
• Puts your primary home at risk
• Must qualify based on personal income/credit
• May have annual fees

Best for: Using equity in one property to buy/improve another. Down payment source for next deal.

Which financing strategy to use?

Scenario 1: W-2 employee, first rental
→ Conventional (lowest rate, most available)

Scenario 2: Self-employed, strong rental income
→ DSCR (no income verification needed)

Scenario 3: Multiple properties, don't want personal DTI hit
→ DSCR (unlimited properties, doesn't count against you)

Scenario 4: Buying fixer-upper to renovate
→ Hard money → refinance to conventional/DSCR after rehab (BRRRR)

Scenario 5: Need down payment cash, have home equity
→ HELOC on existing property

Scenario 6: Complex income, lots of write-offs
→ Portfolio loan or DSCR

Rental income qualification

Conventional: Can use 75% of rent to offset payment, but need 2-year rental history or lease + 6 months reserves.

DSCR: Uses market rent (from appraisal) immediately. No history needed.

Portfolio: Varies by lender.

Multiple property strategies

1-4 properties: Conventional works well

5-10 properties: Mix conventional + DSCR

10+ properties: DSCR only (conventional caps at 10)

Down payment comparison

Loan Type	Minimum Down
Conventional 1-unit	15%
Conventional 2-4 unit	25%
DSCR	20-25%
Portfolio	20-30%
Hard Money	10-30%

Rate comparison (2026)

Loan Type	Rate Range
Conventional	6.75-7.25%
DSCR	7.0-8.0%
Portfolio	7.0-8.5%
Hard Money	9-12%+

California considerations

High prices = bigger loans: Rate differences matter more. 0.5% on $800K is $233/month.

Strong rental markets: Most California rentals hit DSCR minimums easily.

1031 exchange friendly: All these loan types work with 1031 exchanges.

Earthquake insurance: Factor into DSCR calculations.

Common mistakes

1. Using conventional when DSCR is better
Self-employed investors often show low tax income. DSCR ignores that.

2. Draining reserves
Keep 6+ months reserves per property.

3. Not shopping lenders
Rates and terms vary widely. Compare 2-3 lenders.

4. Ignoring cash flow
Don't buy properties that barely break even. Aim for positive cash flow after all expenses.

5. Forgetting about taxes and insurance
California property taxes are 1-1.3% annually. Insurance can be $2K-$5K+. Factor into your DSCR.

Next steps

1. Determine your strategy: Buy-and-hold? BRRRR? Flip?
2. Check your qualification: Income, credit, down payment, reserves
3. Match financing to strategy: Use the right tool for your situation
4. Shop lenders: Compare conventional vs. DSCR vs. portfolio
5. Run the numbers: Ensure positive cash flow

Want to see which financing works best for your next rental? Get A Quote.

More investment property financing options

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CA DRE #01212512 | NMLS #2787839
Bill McCoy | 888-421-1117 | info@loanall.com