How to Get a Cash-Out Refinance on an Investment Property

A cash-out refinance can be a great way to access the built-up equity in your investment property. However, doing so may not always be as simple as refinancing a primary residence.

To give you an idea of what to expect, we’ll cover all the specifics of getting a cash-out refinance on an investment property, focusing on the most important details you need to know.

What Is a Cash-Out Refinance for an Investment Property?

A cash-out refinance for an investment property is basically the same as a traditional cash-out refinance, but you’re receiving cash for a property that isn’t your primary residence — most often, an investment property.

Essentially, you’re replacing your investment property’s loan with a new, bigger loan in order to access the equity you’ve built in the property.

The difference in the new loan and the existing loan’s outstanding balance is given to you in cash. You can use this money however you want, but most people use it for making property improvements or purchasing more investment properties.

Reasons to Get a Cash-Out Refinance on an Investment Property

Why do a cash-out refi on an investment property? In many cases, investors tap into their built-up equity to increase their property’s market value or rentability. This could be:

• Modernizing the kitchen or other features
• Adding extra bedrooms or bathrooms
• Improving curb appeal
• Converting a single-unit property into multi-unit

You could also choose to use the funds to invest in other rental properties, whether that means cashing out enough for a down payment or the entire purchase price.

Sometimes, it may even make sense to do a cash-out refinance and use the funds to pay off other higher-rate debts, such as a carried credit card balance.

Equity Requirements for Refinancing Investment Properties

Equity requirements are higher for refinancing rentals than most other real estate types. Conventional guidelines require at least 25% equity for a standard rate-and-term refinance, aka maximum 75% loan-to-value or LTV.

To do a cash-out refinance on an investment property, you will need 25% remaining equity for a single-unit home and 30% remaining equity (70% LTV) for those with two to four units.

Remember, this is required remaining equity. For a cash-out refinance, that’s how much equity you must have left over after you take out the funds you need.

Plus, make sure to consider closing costs, as they’ll either increase the amount you need to borrow or reduce the amount you can withdraw. Closing costs for a conventional refinance typically run between 2% and 4% of the loan balance.

Example #1: You want to refinance a single-family investment property valued at $225,000. You currently have a mortgage for $100,000 and would like to cash out an additional $50,000. Based on a 25% equity requirement, the largest loan your property could qualify for would be about $168,000. Assuming closing costs of $4,500 (3%), the $154,500 ($150k + $4,500 closing costs) total would be within the lender’s maximum LTV.

Example #2: You want to refinance a triplex valued at $450,000. Your existing mortgage is $250,000, and you’d like to withdraw $75,000 of your equity. Based on a 30% equity requirement, the largest loan your property could qualify for would be $315,000. Assuming closing costs of $10,000 (~3%), the most you could cash out would be $55,000.

Example #3: You want to refinance a duplex valued at $350,000 and do not currently have a mortgage on the property. You plan to use the funds to purchase another rental and would like to borrow as much as possible. Based on a 30% equity requirement, you could borrow up to $245,000. Assuming closing costs of $7,500 (~3%), you could potentially get cash-in-hand at closing up to $237,500.

What Else Do Lenders Require for a Cash-Out Refinance?

On top of equity requirements, you must also meet other lender standards to qualify for a cash-out refinance. Here’s what to expect:

• Conventional guidelines require a minimum credit score of 620 for all purchase and refinance loans. However, most lenders will be looking for a score of 640 or higher to approve a cash-out refinance on an investment property. 
• You will also want a debt-to-income ratio of 45% or below. In many cases, you may be able to use some of the income from your investment property to help you qualify.
• If you currently have a mortgage, the primary loan must be at least 12 months old. However, you can use the funds from your cash-out to pay off second loans and liens of any age.
• At least one borrower needs to have been on the title for a minimum of six months. There are exceptions to this, such as refinancing to reimburse an all-cash purchase, or receiving the property through inheritance or court order.
• All investment property transactions will require proof of reserve funds equal to six months of housing expenses.

Cash Reserves for Multiple Financed Properties

If you have other financed investment properties, you’ll likely need additional reserves. This reserve amount is calculated as a percentage of your total outstanding mortgage balance, not including your primary residence and the property you’re refinancing.

# of Financed Properties	% of Total Loan Balance
1-4	2%
5-6	4%
7-10	6%

Note: In addition to your primary residence and the investment being refinanced, you can exclude any properties that are pending sale or will otherwise be paid off by closing.

Maximum Loan Limits

To qualify for a conventional cash-out, loans must be within the limits set annually by the Federal Housing Finance Agency. Here’s what the loan limits look like for 2024.

# of Units:	Maximum Loan	Maximum Loan (High-Cost Areas)
One	$766,550	$1,149,825
Two	$981,500	$1,472,250
Three	$1,186,350	$1,779,525
Four	$1,474,400	$2,211,600

Delayed Financing Cash-Out Refinance

If you recently purchased your investment property with cash – meaning you didn’t use any type of direct financing – you may be able to do a cash-out refi sooner than six months thanks to the delayed financing rule.

To qualify for a no-wait cash-out refinance, you must have:

1. Purchased the property in an arm’s length transaction
2. Not used any financing to complete the purchase
3. No current loan or lien attached to the title
4. Proof of the source of funds that were used for the purchase

It’s possible to use a HELOC or other line of credit on another property or asset and still qualify for delayed financing. In this situation, however, the proceeds would need to pay off these accounts first before you receive cash back.

Long-Term vs Short-Term Rentals

When you refinance a long-term rental, mortgage companies generally request a copy of your signed lease or a declaration of your intended rental amount for vacant properties. You can often use up to 75% of this income to help you qualify for your loan.

However, if you’re trying to do a cash-out refinance on a short-term rental, the process may be a little more complicated. Lenders are often more hesitant to lend on these properties, and most won’t recognize your short-term income unless you have tax returns showing an established and steady income history.  

Even still, lenders may only be willing to consider a portion of the income due to the volatility of the short-term rental market.

For a cash-out refinance on a short-term rental, you may want to look into non-conforming DSCR loans. These mortgages are designed for investors, with individual lenders each setting their own guidelines. If your short-term rental is generating healthy income, you’ll likely find that qualifying for a DSCR is much simpler.

Investment Property Cash-Out Refi Rates

Cash-out refinances carry a higher interest rate than the standard rate-and-term refi. Similarly, lenders charge more for investment properties than for primary residences or second homes.

This means that investment property cash-out refinance rates are among the highest-costing conventional loans. You could be looking at a rate that’s 1% to 2% or even higher than a basic primary residence refi.

While it’s always a savvy decision, it’s even more crucial to shop around with different lenders – plan to apply with at least three – to price your investment property refinance.

Still, the costs of a cash-out refi are likely to be lower than tapping your equity with a HELOC or borrowing the funds through an unsecured personal loan.

Pros & Cons: Cash-Out Refinance on an Investment Property

Doing a cash-out refinance on your investment property can be a smart move if you have a practical way to use the funds. But even still, there are some disadvantages to a cash-out refi that you’ll want to consider before taking out a loan.

Pros of a Cash-Out Refinance

• You can use the funds to reinvest in your property, increasing its value and upping the amount you can collect in rent.
• Having access to cash allows you to purchase other investments that may not allow for financing due to property conditions or the need to close quickly.
• Other sources of funding, such as personal loans or lines of credit, generally have higher interest costs.
• If your existing mortgage has an above-market rate, it may be possible to cash out equity and reduce your interest costs simultaneously. In some scenarios, this could mean taking out cash and ending up with a lower monthly payment.

Cons of a Cash-Out Refinance

• Increasing your loan balance will increase your monthly payments. This could up the risk of default if you run into issues with cash flow.
• Cash-out refis – especially on investment properties – have some of the highest conventional interest rates.
• Refinances come with closing costs. With a conventional cash-out refi, you can expect to spend between 2% and 4% of your loan amount.
• Reducing your equity now prevents you from using it in the future if the need arises.

Alternatives to a Cash-Out Refinance

A cash-out refinance is an effective way to tap your investment property’s built-up equity. However, other options may be a better fit in some scenarios.

HELOCs and Home Equity Loans

Home equity loans and home equity lines of credit (HELOCs) are subordinate loans that let you borrow against your property’s equity without having to refinance your existing mortgage. This can be ideal for anyone who only needs to access a little bit of cash or is currently locked into a low interest rate.

With a home equity loan, you receive a one-time lump sum with a fixed repayment schedule, much like a cash-out refinance.

HELOCs provide you with an adjustable-rate open line of credit that you can borrow against, repay, and use again as often as you’d like over the loan’s initial phase, typically lasting from five to ten years.

While HELOCs and home equity loans are common for borrowers taking equity out of their primary residences, it’s a bit tricker to use home equity for investment properties. Fewer lenders offer these types of mortgages, and those who do will likely have stringent criteria.

Personal Loans

Personal loans are a type of unsecured financing generally issued by banks, credit unions, and private lenders. Eligibility is based on the borrower’s creditworthiness, and loans are not backed by any property or other asset.

Since they are unsecured, personal loans generally have higher interest costs than mortgages – even investment property cash-out refis – although well-qualified borrowers may find the rates quite reasonable. Regardless, the costs will be lower than those of other types of unsecured loans, such as credit cards.

Keep in mind that you may not qualify to borrow as much with a personal loan as you would with a cash-out refinance and that the payment schedule will be shorter. Most personal loans have a term of seven years or fewer.

Build Up the Cash Without Borrowing

Borrowing against your investment’s equity has costs. First and foremost, the interest you’ll pay on the additional balance. Paying more each month also reduces your cash flow, which means less wiggle room in a crunch.

Plus, loans have closing costs – often ranging from 2% to 4% for conventional cash-outs. If you only plan to borrow a small amount, these fees can represent a significant portion of your equity withdrawal.

Instead, it may be more practical to build up the cash you need over time without borrowing. While it will take longer, you won’t be adding to your debt level and will likely save yourself thousands of dollars or more in interest and closing costs.

Finding the Best Cash Out Refi For Your Investment Property

If you have enough built-up equity and meet the other conventional lending requirements, you can likely convert that investment property equity into a lump sum of cash with a cash-out refinance.To find out how much you qualify to borrow and what kind of payments you can expect, check out the current refinance rates and apply with a cash-out refi lender serving investors within your community.