Cash-Out Refinance on a Rental: Pulling Equity to Fund the Next Deal

How a cash-out refinance works

You take a new loan against the property, sized on today's appraised value. It pays off any existing debt and the closing costs, and the rest comes to you. On a rental, that cash can become the down payment on the next property while the house keeps producing rent.

For investors, the new loan is often a DSCR loan, so it qualifies on the property's rent rather than your personal income; see DSCR loans, explained. The new payment still has to work: the rent needs to cover it at the ratio the lender requires.

The numbers that decide your cash-out

Appraised value. Everything is sized from it, so the appraisal is the event to prepare for.

Maximum loan-to-value. Cash-out limits usually sit below purchase limits. Many lenders land around 70 to 75% for rentals, varying with credit, property type and the ratio.

DSCR on the new payment. A bigger loan means a bigger payment, and it still has to clear the lender's coverage ratio.

Seasoning. Many lenders require a minimum ownership period, often somewhere between 3 and 12 months, before they'll use the new appraised value. Before then, some cap the loan at your purchase price plus documented rehab costs.

A BRRRR refinance example

An investor buys a house for $200,000 cash and puts $50,000 into the rehab. Once finished, it rents for $2,700 a month and appraises at $340,000.

Deal sheet: BRRRR refinance, illustrative

At 75%, the investor recovers almost every dollar and still owns a rental that covers its payment with room to spare. That recovered cash funds the next deal, which is the whole point of buy, rehab, rent, refinance, repeat.

The BRRRR cycle on this deal: $250,000 in, $248,000 back at 75% LTV, and a rental that still covers its payment 1.24 times.

Before you apply

• Document the rehab. Invoices, photos and permits support both the appraisal and any cost-based limit.
• Get it rented. A signed lease at market rent makes the DSCR math and the appraisal easier.
• Know your current loan's terms. Check for a prepayment penalty on the debt you're paying off.
• Check the clock. Count the months since purchase against the lender's seasoning rule.
• Run the payment first. Make sure the new payment still leaves the cash flow you want.

Finished a rehab recently? Send what you paid and what you put in, and we'll estimate your cash-out. Estimate my cash-out

When rate-and-term beats cash-out

If you don't need the cash, a rate-and-term refinance with no cash out can bring better pricing and a lower payment. Pull cash when you have a specific use for it, like the next down payment, not just because the equity is there. Coming off a flip? Start with how fix-and-flip loans are structured.