Hard Money vs. DSCR Loans: Which Is Right for Your Investment?

One of the most common questions from real estate investors is whether they should use a hard money loan or a DSCR loan. The answer depends entirely on your strategy, timeline, and the specific deal. Here’s how to think about it.

The Fundamental Difference

Hard money loans are short-term, asset-based loans designed for acquisitions, renovations, and quick exits. Think 6-18 month terms, interest-only payments, and higher rates (10-15%). You use them when you need to close fast, when the property needs work, or when you plan to sell or refinance within a year.

DSCR loans are long-term rental financing designed for stabilized (or nearly stabilized) income-producing properties. Think 30-year terms, lower rates (7-10%), and qualification based on the property’s cash flow. You use them when you’re buying and holding.

When Hard Money Makes Sense

Hard money is your tool when the property can’t qualify for long-term financing yet. Classic scenarios include fix-and-flip projects where you’re buying below market, renovating, and selling within months. Properties that are vacant or in poor condition that wouldn’t pass a standard appraisal. Competitive situations where you need to close in 7-14 days. Deals where the value-add opportunity justifies the higher cost of capital.

The key insight: hard money is expensive but temporary. You pay a premium for speed and flexibility, but you’re only paying that premium for a short period.

When DSCR Makes Sense

DSCR loans are your long-term financing tool. They make sense when you’re purchasing a property that already has a tenant in place (or can be rented immediately). Refinancing out of a hard money loan after renovations are complete. Building a buy-and-hold portfolio where you want 30-year fixed-rate stability. Situations where you want to keep the property for years and optimize monthly cash flow.

The BRRRR Strategy: Using Both

Many experienced investors use hard money and DSCR loans together in what’s known as the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat). You purchase a property with hard money, renovate it, place a tenant, then refinance into a DSCR loan for the long term. The DSCR loan pays off the hard money loan, and if you’ve added enough value, you can pull some or all of your original cash investment out.

This strategy works because each loan type does what it’s best at: hard money handles the acquisition and renovation phase, and the DSCR loan handles the long-term hold.

Cost Comparison

For a $300,000 property held for 5 years with a DSCR loan at 8% on a 30-year term, your monthly payment (principal and interest) would be approximately $2,201.

The same property financed with hard money at 12% interest-only would cost $3,000/month — but you’d only pay this for the renovation period (say 4-6 months) before refinancing.

The takeaway: hard money costs more per month, but the total cost over the life of the investment is driven by how quickly you transition to permanent financing.

Making Your Decision

If you’re buying a rent-ready property and plan to hold it, go straight to a DSCR loan. If the property needs significant work or you’re doing a flip, start with hard money. If you’re executing a BRRRR strategy, plan for both from the beginning — and make sure your hard money lender’s terms give you enough time to complete renovations and stabilize the property before you need to refinance.