Conventional investment property loans
If your income is easy to document, a conventional loan usually offers the best pricing on a rental. Expect a larger down payment than for a home you live in, commonly 15% to 25% depending on the number of units, plus cash reserves. Fannie Mae allows up to 10 financed properties per borrower.
DSCR loans
A debt service coverage ratio (DSCR) loan qualifies you on the property’s rent instead of your personal income. The lender divides the monthly rent by the full monthly payment, including taxes, insurance and any HOA dues. A ratio of 1.0 means the rent exactly covers the payment, and many lenders look for 1.0 to 1.25 or higher.
- Usually no tax returns or pay stubs, which helps self-employed investors and anyone with large write-offs
- Can close in an LLC
- Typically 20% to 25% down
- Higher rates than conventional, and many DSCR loans carry a prepayment penalty for the first few years
In South Florida, high insurance and HOA costs can push the ratio below 1.0 on properties that look fine on rent alone. Run the full payment before you commit.
Short-term rentals
Some lenders will qualify a vacation rental on its projected short-term income. Check the local rules first: many South Florida cities and most condo associations restrict short-term rentals or set minimum lease terms. See condo financing for how rental rules affect a building’s eligibility.
What cost segregation does
Residential rental property normally depreciates over 27.5 years, and commercial property over 39. A cost segregation study, prepared by engineers and tax specialists, identifies the parts of a building that qualify for shorter lives: 5 or 7 years for items like appliances, carpeting, cabinetry and some electrical work, and 15 years for land improvements like parking, landscaping, fencing and pools.
Typically 15% to 40% of a property’s depreciable basis can be moved into those shorter lives. With bonus depreciation, restored to 100% for property acquired after January 19, 2025, much of that can be deducted in the first year.
Example: on a rental building with a $1,000,000 depreciable basis, reclassifying 25% moves $250,000 of deductions into the early years instead of spreading it over 27.5 years. Your actual tax savings depend on your bracket and whether you can use the losses.
Who benefits most
- Owners of residential rentals, multifamily, retail, office, industrial or hospitality property, typically with a depreciable basis of $500,000 or more
- Investors who recently bought, built or renovated a property
- Owners of property placed in service in earlier years: a “look-back” study can catch up missed depreciation on your current return without amending prior years
- Real estate professionals, and investors who materially participate in short-term rentals, who can use rental losses against other income
Rental losses are generally passive. If you don’t qualify for one of the exceptions above, the extra depreciation may carry forward instead of lowering this year’s taxes. Depreciation is also subject to recapture when you sell. Review any study with your CPA before you order it.
