Cash-out refinances are available on rental properties if you use a conventional loan. You can use the cash for nearly any purpose, including expanding your rental portfolio.
Lending rules allow you to get “cash out” of an investment property just like you would for a primary residence.
You open a larger loan than what you currently owe and receive the difference in cash.
For example, you owe $200,000 on your rental home. If the property is worth enough, you can open a $300,000 loan and get $100,000 cash, less closing costs. Use the cash for any purpose.
Surprisingly, nearly all lenders allow this strategy if you qualify. Here’s how to get approved.
Maximum Loan Amounts
For conventional loans, your cash-out loan can go up to 70-75% of the home’s current value. For one- to four-unit residential properties, the new value is based on nearby homes, not their income potential.
Investment Home Property Type | Cash-Out LTV |
Single-family, condo, townhouse | 75% |
2-4 unit | 70% |
For example, a $250,000 single-family rental property is eligible for a cash-out refinance up to $187,500 (75%).
Qualification and DTI
Keep in mind that you must qualify for the new payment. You can use rental income to help qualify, but you’ll also need to show other income on your tax returns or from a W-2 job.
The lender will factor in other debts, such as your primary residence. All housing and other debts shouldn’t exceed 43% of your income.
Loan limits
Another less common cap for your loan amount is the current conforming loan limit. Search your area's limit here.
Reserves
You will need to show cash “reserves” (not including cash from the refinance) to qualify.
If you own up to four financed properties, you will need cash in reserve of 2% of all loan balances. Your primary home and the property you’re refinancing don’t count, so this may not apply if you just own the home you live in and one rental.
For five to six properties, you need 4% of all loan balances and 6% for seven to 10 properties.
Take someone with five rental properties with $200,000 loan balances each. That’s a total of $1 million in outstanding loans. They would need 4% of this amount, or $40,000 in reserves, to qualify for the new cash-out refinance.
Interest Rates
Conventional lenders often apply steep pricing adjustments to investment property cash-out refinances. Both Fannie Mae and Freddie Mac impose significant loan-level price adjustments (LLPAs) based on loan-to-value (LTV), credit score, and occupancy type, and investment properties with cash-out refinancing typically land at the higher end of the pricing scale.
For example, a 720 credit score borrower would pay 4.125 points above standard pricing for a 75% LTV rental property with a cash-out loan. On a $200,000 loan, this would require an extra $8,250 in fees or an interest rate that’s about 1.5-2.5% higher than standard market rates.
Most lenders can’t raise your mortgage rate enough to cover these costs. You must pay them out of pocket or roll them into the loan.
Check out alternatives to conventional investment property mortgages, which are listed in the next section.
Alternatives to Conventional Investment Property Financing
With conventional investment property pricing, it’s a good thing Fannie Mae and Freddie Mac aren’t the only options. You may find better rates and terms with other programs.
DSCR loan: A debt service coverage ratio (DSCR) loan is approved based on the property’s cash flow, not your personal income. It’s difficult for real estate investors and self-employed individuals to prove personal income, so this is a great alternative.
Bank loan: Talk to your local credit union or bank. They may have their own cash-out programs for customers, and rates may be lower.
Business loan: If you own multiple properties, a business loan might be a better option than pulling money out of a specific one. This could give you the capital to buy or rehab that next property or accomplish other business purposes.
HELOC: A home equity line of credit on your primary residence or even a rental property gives you the flexibility to pay off and re-borrow as needed.
Cash-out refinance on your primary home: You can get cheaper financing by tapping into the equity in your primary residence instead of the rental. Primary home mortgage rates are much lower.
Pros and Cons of Cash-Out Refinancing on an Investment Property
Pros
Use the cash to improve the property
Invest in more real estate
Access a large amount of cash at a fixed interest rate
Potentially drop your rate or get into a more stable loan while getting cash
Build an emergency fund for vacancies and repairs
Cons
Closing costs of $5,000-$10,000 or more
High mortgage rates
May lose your low rate on the existing loan
Reduce cash flow from the property
How to Use the Cash
While you can use the cash for any purpose, it’s smart to reinvest in your real estate business.
An affordable remodel, adding air conditioning, or improving curb appeal can increase your rental income and give you a solid return on investment.
Another good idea is to use cash-out proceeds for a down payment on another property. With $75,000, you could put 25% down on a $300,000 rental home.
While there’s no rule against paying personal bills with the money, your primary goal should be to improve your real estate, command higher rents, and increase cash flow.
Related: 3 Home Improvements with the Best ROI (and 3 with the Worst)
See If You Qualify for a Rental Property Cash-Out Refinance
Lenders became risk-averse after the 2008 housing downturn, so it’s a welcome surprise that rental property cash-out refinances are still available.
See how much cash you can get and if this strategy is right for you.
