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Cash-Out Refinance on Investment Property

A cash-out refinance on an investment property replaces the existing mortgage with a larger loan, delivering the equity difference as cash at closing. Conventional guidelines cap the loan-to-value at 75% for single-family and 70% for 2-4 unit investment properties, with a six-month minimum ownership seasoning period and interest rate premiums above primary residence refinance rates.

Key Takeaways

  • Conventional cash-out refinance on a 1-unit investment property is capped at 75% LTV; 2-4 unit properties are capped at 70% LTV .
  • A six-month seasoning period is required before a cash-out refinance can be based on the current appraised value rather than the original purchase price.
  • Interest rates on investment property cash-out refinances carry cumulative LLPAs for occupancy type, transaction type, LTV, and credit score, often resulting in rates 0.75-1.50% above primary residence rate-and-term refinances.
  • DSCR lenders offer cash-out refinance programs without income documentation, typically up to 75% LTV, but with higher rates and potential prepayment penalties.
  • Cash-out proceeds are not taxable income because they represent borrowed funds, making refinancing more tax-efficient than selling to access equity.
  • HELOCs on investment properties are not widely available, making cash-out refinances the primary tool for accessing investment property equity.
  • The delayed financing exception allows investors who paid cash to refinance within six months, limited to the original purchase price plus closing costs.

How It Works

The Cash-Out Refinance Process for Investment Properties

The cash-out refinance process on an investment property follows the same general sequence as any mortgage refinance, with additional requirements specific to investment properties. The investor applies with a lender, providing documentation of the property’s current rental status, existing mortgage payoff amount, and the borrower’s financial profile. The lender orders an appraisal to determine the property’s current market value, which establishes the maximum loan amount based on the allowable LTV ratio.

For conventional loans, the appraiser may use a combination of comparable sales and, for multi-unit properties, an income approach to arrive at the value. The appraiser also inspects the property’s condition, which can be a concern for investors who purchased distressed properties and completed renovations. If the renovations were recent, the appraiser assesses whether the improvements are complete and consistent with the neighborhood’s standards.

Once the appraisal is completed, the lender calculates the maximum loan amount (e.g., 75% of $400,000 appraised value = $300,000). The existing mortgage payoff is subtracted from this amount, and closing costs are deducted. The remaining balance is the net cash-out the investor receives. For example, if the existing mortgage balance is $200,000 and closing costs are $8,000, the investor receives $92,000 in cash ($300,000 – $200,000 – $8,000).

Underwriting Considerations for Investment Cash-Out

Conventional investment property cash-out refinances require full documentation of the borrower’s income, assets, and liabilities. The lender calculates the borrower’s debt-to-income ratio including the new, higher mortgage payment on the subject property plus all other monthly obligations. Rental income from the subject property and other owned properties is included in the income calculation, typically at 75% of the gross rent to account for vacancies and maintenance (the Fannie Mae standard rental income offset).

The lender also verifies that the borrower meets the reserve requirements, which are more stringent for cash-out transactions. Reserves must remain after the cash-out closing, meaning the cash-out proceeds themselves cannot be counted as reserves unless they are deposited into a verified liquid account. The lender reviews the borrower’s credit history for any mortgage late payments, which can disqualify the transaction or trigger manual underwriting requirements.

For DSCR cash-out refinances, the underwriting focuses on the property’s income-to-debt ratio rather than the borrower’s personal income. The lender calculates the DSCR by dividing the property’s monthly rental income (typically evidenced by a lease agreement and rent roll) by the proposed monthly PITI payment. Most DSCR lenders require a minimum 1.0 DSCR for cash-out transactions, with better pricing available at 1.25 or higher. Some lenders offer no-ratio DSCR programs where the DSCR is not calculated, but these typically require lower LTV (65-70%) and carry the highest rates.

Timeline and Execution

A conventional investment property cash-out refinance typically takes 30-45 days from application to closing, though complex files or appraisal delays can extend this timeline. DSCR cash-out refinances may close faster (21-30 days) because the reduced income documentation streamlines the underwriting process. The investor should coordinate the refinance timing with their capital deployment plans, particularly if the cash-out proceeds are intended to fund a time-sensitive acquisition.

The right of rescission, which provides a three-day cancellation window after closing on primary residence refinances, does not apply to investment property transactions. The loan funds are disbursed at closing without a waiting period, allowing the investor to deploy the capital immediately. This is an important procedural advantage for investors executing time-sensitive strategies.

Related topics include investment property mortgage rules, rental property down payment requirements, portfolio loans for real estate investors, 1031 exchange and mortgage implications, and scaling a rental portfolio with financing.

Key Factors

Factors relevant to Cash-Out Refinance on Investment Property
Factor Description Typical Range
Maximum LTV Ratio The highest loan-to-value ratio allowed on a cash-out refinance, which determines how much equity can be extracted. Conventional: 75% (1-unit), 70% (2-4 unit); DSCR: 70-75%; Portfolio: varies by lender.
Seasoning Period Minimum ownership duration before a cash-out refinance can be based on current appraised value rather than original purchase price. Conventional: 6 months minimum; DSCR: 6-12 months depending on lender; Delayed financing exception allows earlier refinance at original cost basis.
Interest Rate Premium Additional rate above a comparable primary residence refinance, resulting from cumulative loan-level price adjustments for investment occupancy, cash-out transaction type, and LTV. 0.75% to 1.50% above primary residence rate-and-term refinance rates, varying by credit score and LTV.
Credit Score Borrower's FICO score affects eligibility, maximum LTV availability, and the magnitude of pricing adjustments. 620 minimum for most programs; 700+ recommended for best pricing; below 680 faces steep LLPA stacking.
Prepayment Penalty (DSCR/Non-QM) A fee charged if the loan is paid off or refinanced within a specified period, common on DSCR cash-out products. Commonly 3-2-1 or 5-4-3-2-1 step-down structures; some programs offer no prepayment penalty at a higher rate.

Examples

BRRRR Strategy Cash-Out After Renovation

Scenario: An investor purchases a distressed single-family property for $180,000, invests $50,000 in renovations, and the property appraises at $320,000 after stabilization. The investor holds the property for seven months before applying for a conventional cash-out refinance at 75% LTV.
Outcome: The maximum loan amount is $240,000 (75% of $320,000). After paying off the original acquisition loan of $180,000 and approximately $6,000 in closing costs, the investor receives $54,000 in cash. This recovers most of the $50,000 renovation investment while retaining $80,000 in equity. The investor uses the $54,000 toward the down payment on the next acquisition.

DSCR Cash-Out to Avoid Income Documentation

Scenario: A self-employed investor owns a rental property free and clear, appraised at $500,000. The property generates $3,200 per month in rent. The investor wants to extract equity but has complex tax returns showing minimal taxable income due to depreciation and business deductions.
Outcome: A DSCR lender approves a cash-out refinance at 75% LTV ($375,000 loan). The proposed PITI is $2,400, yielding a DSCR of 1.33. No tax returns are required. The investor receives approximately $365,000 after closing costs and deploys it across two additional property acquisitions.

Delayed Financing Exception After Cash Purchase

Scenario: An investor purchases a rental property for $250,000 using cash to win a competitive bidding situation. Within 60 days of closing, the investor applies for a cash-out refinance under the delayed financing exception. The property appraises at $280,000.
Outcome: Under the delayed financing exception, the maximum loan is the lesser of the original purchase price plus closing costs ($250,000 + $5,000 = $255,000) or 75% of the appraised value ($210,000). The investor can borrow $210,000, recovering 84% of the purchase price without waiting six months. The investor retains the property and redeploys the $210,000 toward additional investments.

Common Mistakes to Avoid

  • Refinancing before the seasoning period expires and expecting the full appraised value

    If the investor refinances within six months of purchase, the maximum loan is based on the original purchase price plus documented improvements, not the current appraised value. Investors who renovate and attempt to refinance too early will not capture the full value increase.

  • Ignoring prepayment penalties on DSCR cash-out products

    Many DSCR cash-out refinances include prepayment penalties of 3-5% in the early years. An investor who plans to sell or refinance again within 2-3 years may pay tens of thousands in penalties. Always verify the prepayment structure before closing.

  • Depleting all reserves through the cash-out refinance

    Taking the maximum cash-out while leaving minimal reserves creates vulnerability to vacancies, repairs, or market downturns. Lenders also require documented reserves after closing, and over-leveraging the portfolio through aggressive cash-out can jeopardize future loan qualification.

  • Assuming a HELOC is readily available as an alternative to cash-out refinance

    HELOCs on investment properties are not widely available from major lenders. Investors who assume they can obtain a HELOC instead of a cash-out refinance may find limited options, unfavorable terms, or outright unavailability, delaying their capital access plans.

Documents You May Need

  • Current mortgage statement showing existing loan balance and payment history
  • Executed lease agreement(s) for the subject property showing rental income
  • 60 days of bank statements for reserves verification
  • Two years of federal tax returns with all schedules (conventional) or waived for DSCR
  • Property insurance declarations page
  • Most recent property tax statement or tax assessment

Frequently Asked Questions

What is the maximum LTV for a cash-out refinance on an investment property?
For conventional loans, the maximum is 75% LTV on a single-family investment property and 70% on a 2-4 unit investment property. DSCR lenders typically offer up to 75% LTV as well, though some cap at 70%. Individual lender overlays may impose lower maximums.
How long do I need to own the property before I can do a cash-out refinance?
The standard seasoning period is six months from the date of purchase. After six months, the refinance can be based on the current appraised value. Within the first six months, the loan amount is limited to the original purchase price plus documented improvements. The delayed financing exception allows earlier refinance for properties purchased with cash, limited to the original purchase price.
Are cash-out refinance proceeds taxable?
No. Cash-out refinance proceeds are borrowed funds, not income, and are not taxable. This makes refinancing more tax-efficient than selling the property to access equity, which would trigger capital gains tax. However, the interest on the new, larger loan is deductible as an investment property expense.
Can I get a HELOC on an investment property instead of a cash-out refinance?
Investment property HELOCs are not widely offered by major lenders. Some community banks and credit unions provide them, but availability is limited, rates are typically variable and higher than fixed-rate cash-out refinances, and combined LTV caps are conservative. For most investors, the cash-out refinance is the more accessible option.
Does a cash-out refinance affect my ability to get future mortgages?
Yes. The higher loan balance increases the monthly payment reported on your credit and used in DTI calculations for future loans. It also reduces the equity in the refinanced property, which affects reserve calculations. Investors should model the impact of the cash-out on their aggregate debt-to-income ratio and reserve position before proceeding.
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