Mistake #3 – Choosing the Wrong Loan Program for an Investment Property

Choosing the wrong loan program is one of the most expensive mistakes investors make, and it’s surprisingly common. Loans should be evaluated holistically, not in isolation.

A great example is comparing conventional investment loans to DSCR loans.

Imagine a self-employed investor earning $300,000 in gross revenue with $200,000 in net profit. They want to buy a $500,000 rental property. To qualify for a conventional investment loan, the lender determines they need to show $150,000 in taxable income.

In California, that income could trigger roughly $48,450 in combined federal and state taxes. On a $400,000 loan at 7%, the monthly principal and interest payment would be about $2,661.

Now compare that to a DSCR loan at 7.75%. The monthly payment would be about $2,866—roughly $205 more per month, or $2,460 per year.

At first glance, the DSCR loan looks worse. But here’s where the bigger picture matters.

Because DSCR loans don’t rely on personal income, the borrower may be able to reduce taxable income to $85,000. That could lower total taxes to around $18,105—saving more than $30,000 annually. Even after paying the additional $2,460 in interest, the investor comes out ahead by roughly $27,885.

This isn’t a rare edge case. These are real scenarios we review with clients and their CPAs all the time—and ones we often choose for our own investments.

Key takeaway:
The right loan program can matter far more than interest rate and, in many cases, can save investors tens of thousands of dollars.