DSCR Loan vs HELOC for Buying Rental Properties: Full Comparison

Using a HELOC (Home Equity Line of Credit) to buy investment properties is one of the most popular strategies among real estate investors. It feels like free money—you tap equity in a property you already own and use it to buy another one. But it's not free, and it carries risks that a DSCR loan doesn't.

This guide compares both options so you can decide which makes more sense for your next rental property purchase.

What Is a HELOC?

A HELOC is a revolving line of credit secured by the equity in a property you own—usually your primary residence, though some lenders offer HELOCs on investment properties.

Think of it like a credit card backed by your house. You get a credit limit based on your equity, draw what you need, pay interest only on what you use, and repay it over time.

How a HELOC Works

1. Lender appraises your property to determine current value
2. Credit limit is set based on a percentage of your equity (usually up to 80%–85% of home value minus existing mortgage)
3. Draw period (typically 10 years): You can borrow and repay as needed, paying only interest on the balance
4. Repayment period (typically 10–20 years): No more draws; you repay principal and interest

Example:

• Home value: $600,000
• Existing mortgage: $300,000
• Max HELOC (80% CLTV): ($600,000 × 80%) – $300,000 = $180,000

Typical HELOC Terms in 2026

• Interest rate: Prime + 0%–2% = approximately 8.0%–10.0% (variable)
• Draw period: 5–10 years (interest-only payments)
• Repayment period: 10–20 years (principal + interest)
• LTV/CLTV: Up to 80%–85% on primary; 70%–75% on investment property
• Credit score: 680+ (higher for investment property HELOCs)
• Income verification: Full (W-2, tax returns, or bank statements)
• Closing costs: $0–$2,000 (many lenders waive closing costs)
• Rate type: Variable (tied to Prime rate)

DSCR Loan: Quick Recap

• Interest rate: 7.0%–8.5% (fixed or adjustable)
• Term: 30-year fixed, ARM, or interest-only options
• Down payment: 20%–25%
• Income verification: None
• Qualification: Based on property's DSCR ratio
• Closing costs: Standard (1%–3% of loan amount)
• Rate type: Fixed available

How Investors Use HELOCs to Buy Rentals

The most common HELOC investment strategy has three steps:

Step 1: Draw from HELOC for the Down Payment

You draw $60,000–$100,000 from your HELOC to use as the down payment on an investment property. You then get a separate mortgage (conventional, DSCR, or other) for the remaining 75%–80%.

Step 2: Collect Rent, Pay Down HELOC

Rental cash flow goes toward paying down the HELOC balance. Because the HELOC is interest-only during the draw period, your monthly obligation is relatively low.

Step 3: Repeat

Once the HELOC is paid down, you draw again for the next property. The HELOC becomes a revolving acquisition fund.

Alternative: Buy the Property Entirely with the HELOC

If the property is cheap enough (under your HELOC limit), you can buy it outright with the HELOC—no second mortgage needed. This works for lower-cost markets where properties sell for $80,000–$150,000.

Side-by-Side Comparison

The Real Comparison: DSCR Loan vs HELOC as Down Payment + DSCR

Most investors don't choose between a HELOC or a DSCR loan—they use a HELOC with a DSCR loan. The HELOC provides the down payment; the DSCR loan finances the property. Let's look at this combination vs. using cash for the down payment.

Scenario: Buying a $300,000 Rental Property

Option A: Cash Down Payment + DSCR Loan

• Down payment: $75,000 (cash from savings)
• DSCR loan: $225,000 at 7.5%, 30-year fixed
• Monthly DSCR payment: $1,573 (P&I) + $400 (T&I) = $1,973
• Monthly rent: $2,400
• Cash flow: $427/month (before maintenance/vacancy)
• Cash invested: $75,000 + ~$5,000 closing costs = $80,000
• Cash-on-cash return: ($427 × 12) ÷ $80,000 = 6.4%

Option B: HELOC Down Payment + DSCR Loan

• HELOC draw: $75,000 at 9.0% variable, interest-only
• HELOC monthly payment: $562
• DSCR loan: $225,000 at 7.5%, 30-year fixed
• Monthly DSCR payment: $1,973
• Total monthly obligations: $1,973 + $562 = $2,535
• Monthly rent: $2,400
• Cash flow: -$135/month (negative!)
• Cash invested: ~$5,000 (closing costs only)
• Cash-on-cash return: Negative until HELOC is paid down

The HELOC strategy sacrifices cash flow for leverage. You get into the deal with almost no cash, but the HELOC interest eats your monthly profit. This only works if:

• You have other income to cover the shortfall
• You're banking on appreciation
• You plan to pay down the HELOC quickly from other sources

When a DSCR Loan Alone Is the Better Choice

1. You Want Positive Cash Flow from Day One

If monthly cash flow matters to you (and it should for most buy-and-hold investors), using a DSCR loan with a cash down payment produces better monthly numbers than stacking a HELOC on top. Every dollar drawn from a HELOC costs 8%–10% in annual interest until it's repaid.

2. You Don't Want to Risk Your Primary Home

This is the risk that HELOC cheerleaders often gloss over. A HELOC is secured by your home. If your investment goes sideways and you can't make the HELOC payments, the lender can foreclose on your primary residence—not the rental property.

A DSCR loan is secured only by the investment property. If the deal fails, you lose the rental property and your down payment. Your home is untouched.

3. You Want a Fixed Rate

HELOCs are almost always variable rate, tied to the Prime rate. In 2026, Prime is around 8.0%, making most HELOCs 8.0%–10.0%. If the Fed raises rates, your HELOC payment increases immediately.

DSCR loans offer 30-year fixed rates. Your payment is locked in regardless of what interest rates do over the next three decades.

4. You're Buying in an Expensive Market

If the property costs $500,000+ and you need a $125,000 down payment, drawing that much from a HELOC creates a massive variable-rate obligation. The interest alone on $125,000 at 9% is $937/month—on top of the DSCR loan payment. The math rarely works on expensive properties.

5. You Don't Want Income Verification

Getting a HELOC requires full income documentation. If you're self-employed and your tax returns show low income, you may not even qualify for a HELOC. The DSCR loan, by contrast, has zero income verification.

When a HELOC Is the Better Choice

1. You're Using It for Quick Acquisitions, Then Paying It Off Fast

The power of a HELOC is speed and flexibility. You can write a cash offer using HELOC funds, close in a week, and then either:

• Refinance into a DSCR loan within 3–6 months
• Pay off the HELOC from rental income or other savings

Using a HELOC as a short-term bridge—not permanent financing—is where it shines. You get the deal under contract fast, then move to permanent financing.

2. You're Buying Low-Cost Properties Outright

In markets where rentals cost $80,000–$150,000, a HELOC can fund the entire purchase. No mortgage at all. The HELOC interest-only payment on $100,000 at 9% is $750/month. If the property rents for $1,200/month, you cash flow $450/month while paying down the HELOC. Once repaid, the property is free and clear—100% cash flow.

3. You Need Funds for Rehab or Closing Costs

DSCR loans don't include rehab funds. If you're buying a property that needs $20,000–$40,000 in work before it's rent-ready, a HELOC can cover the renovation costs that the DSCR loan won't.

4. You Want Revolving Access to Capital

Once you pay down a HELOC, you can draw again—without reapplying. This revolving nature makes it an ongoing acquisition tool. DSCR loans are one-time: each property requires a new application, new appraisal, and new closing.

5. You Want Minimal Closing Costs

Many HELOC lenders waive closing costs entirely. A DSCR loan typically costs 1%–3% in origination fees plus appraisal, title, and other closing costs. On a $250,000 loan, that's $5,000–$10,000.

The BRRRR + HELOC Strategy

Some investors combine HELOC, hard money, and DSCR loans in a powerful cycle:

1. Draw from HELOC for the down payment on a distressed property
2. Use hard money to finance the purchase and rehab
3. Renovate and place a tenant
4. Refinance into a DSCR loan (cash-out refinance at new appraised value)
5. Repay the HELOC from the refinance proceeds
6. Repeat — HELOC balance is back to zero, ready for the next deal

This recycles the same HELOC capital across multiple acquisitions. Each property ends up with a 30-year fixed DSCR loan, and the HELOC resets for the next deal.

Risk Analysis

HELOC Risks

• Variable rate exposure: If Prime rises 2%, your payment increases significantly
• Primary home at risk: Default means losing the roof over your head
• Draw period ends: After 10 years, payments switch from interest-only to fully amortizing—monthly payment can double
• Lender can freeze the line: If home values drop or your credit deteriorates, the lender can freeze or reduce your HELOC limit
• Over-leveraging: Using a HELOC to fund down payments means you're borrowing on top of borrowing—two layers of debt on one property

DSCR Loan Risks

• Prepayment penalties: Selling or refinancing early costs 1%–5% of the loan balance
• Higher rates than conventional: You pay a premium for the no-income-verification convenience
• Property must cash flow: If rents drop or vacancy spikes, you're covering the payment out of pocket
• Limited to investment property: Can't use DSCR for your primary home

Investment Property HELOC: Harder to Get

Most HELOC discussions assume you're tapping your primary home. Getting a HELOC on an investment property you already own is possible but more restrictive:

• Fewer lenders offer them (many banks only HELOC primary residences)
• Lower LTV: 65%–70% max (vs. 80%–85% on primary)
• Higher rates: Add 0.5%–1.0% to primary HELOC rates
• Full income verification required
• Higher credit score minimums (700+)

If you own a rental property with significant equity and want to tap it, expect to shop around. Local credit unions and community banks are more likely to offer investment property HELOCs than big national banks.

Tax Implications

HELOC Interest Deductibility

If you use HELOC funds to buy an investment property, the interest may be deductible as investment interest expense (reported on Schedule E, not Schedule A). This is different from using a HELOC on your primary home for personal expenses, where deductibility was limited by the 2017 tax reform.

Consult a tax professional for your specific situation—the IRS looks at how the funds were used, not just where the HELOC is secured.

DSCR Loan Interest Deductibility

Mortgage interest on an investment property is deductible on Schedule E, regardless of whether it's a conventional loan, DSCR loan, or any other type. The full interest payment reduces your taxable rental income.

Frequently Asked Questions

Can I use a HELOC as the down payment for a DSCR loan?

Yes, but some DSCR lenders require the down payment to come from your own funds (seasoned for 60 days in your account). If you draw from a HELOC and deposit it into your checking account well before applying, most lenders won't question the source. Check your specific lender's guidelines on borrowed down payments.

Is it smart to use a HELOC to buy rental properties?

It can be, but only if you have a clear plan to repay it quickly or refinance the rental into permanent financing. Using a HELOC as permanent financing for an investment property carries variable rate risk and puts your primary home on the line. Use it as a bridge, not a destination.

What's the maximum I can borrow with a HELOC?

Typically up to 80%–85% of your home's value minus your existing mortgage balance. On a $500,000 home with a $250,000 mortgage: ($500,000 × 0.80) – $250,000 = $150,000. Some lenders go up to 90% CLTV for well-qualified borrowers.

Can I get a DSCR loan if I already have a HELOC?

Yes. DSCR lenders don't factor your HELOC payment into their qualification—they only look at the investment property's DSCR ratio. The HELOC won't disqualify you.

What happens to my HELOC if home prices drop?

The lender can freeze your line (prevent additional draws) or reduce your credit limit. If you've already drawn funds, you still owe the balance. This is a real risk in declining markets—your HELOC could be frozen right when you need it most.

Should I pay off my HELOC or invest in another property?

This depends on the HELOC rate vs. the expected return on the next property. If your HELOC charges 9% interest and your next rental yields a 12% cash-on-cash return, the math favors investing. But the rental return isn't guaranteed, while the HELOC interest cost is. Conservative investors pay down the HELOC first. Aggressive investors redeploy immediately.

Can I get a HELOC on a property I bought with a DSCR loan?

In theory, yes—you'd need a lender that offers HELOCs on investment properties (they exist but are less common). The combined LTV (DSCR loan + HELOC) would need to stay under 70%–75%. In practice, few investors do this because the rates on investment property HELOCs are high.

The Bottom Line

HELOCs and DSCR loans aren't competing products—they're complementary tools.

Use a DSCR loan when:

• You're financing the investment property directly
• You want a 30-year fixed rate
• You have cash for the down payment
• You don't want to risk your primary home
• The property cash flows on its own

Use a HELOC when:

• You need cash for a down payment and don't have liquid savings
• You're making a quick cash offer and will refinance later
• You're buying low-cost properties outright
• You need rehab funds that a DSCR loan won't cover
• You want a revolving acquisition fund

Use both when:

• HELOC provides the down payment → DSCR loan finances the property
• BRRRR strategy: HELOC seeds the deal → DSCR loan is the permanent exit

The key principle: use HELOCs as short-term bridge capital, not permanent financing. Get in, get stabilized, refinance into a DSCR loan, repay the HELOC, and repeat.

Ready to finance your next rental property? Get a DSCR loan quote from HonestCasa and stop stacking variable-rate debt on your home.