You can use a cash-out refinance to replace the mortgage on an investment property with a larger loan and receive part of the property’s equity in cash.
Investment-property refinances generally have tighter loan-to-value limits, higher borrowing costs and larger reserve requirements than refinances on primary residences. The lender may also review the property’s rental income, operating history and effect on your full real estate portfolio.
Investment Property Cash-Out Refinance Basics
| Feature |
General Conventional Guideline |
| One-unit investment property |
Maximum cash-out LTV is generally 75%. |
| Two- to four-unit investment property |
Maximum cash-out LTV is generally 70%. |
| Property use |
The property is not occupied as your primary residence or second home. |
| Appraisal |
A property appraisal is generally required to establish the value and support rental-income analysis. |
| Cash reserves |
Conventional underwriting can require six months of reserves for the investment property, plus additional reserves when you own multiple financed properties. |
| Loan pricing |
Investment-property loans generally carry higher rates or pricing adjustments than comparable primary-residence loans. |
These are general conforming-loan guidelines. The approved LTV, reserves and pricing can vary based on the property, number of financed properties, credit, debt-to-income ratio, underwriting findings and lender requirements.
How Does an Investment Property Cash-Out Refinance Work?
The new mortgage pays off the existing loan and other liens that must be satisfied through closing. The remaining eligible proceeds are distributed after closing costs and other required amounts are deducted.
For example, suppose:
- A one-unit rental property is appraised at $400,000.
- The lender permits a 75% LTV.
- The current mortgage payoff is $230,000.
- Closing costs paid from the loan are $8,000.
The estimated calculation would be:
$400,000 × 75% = $300,000 maximum new loan
$300,000 − $230,000 − $8,000 = $62,000 in estimated proceeds
The final amount can change based on the accepted appraisal, formal mortgage payoff, other liens, closing costs and the amount you qualify to borrow.
What Can You Use the Money For?
Cash-out refinance proceeds are generally not restricted to improvements on the refinanced property. Investors may use the money to:
- Make repairs or renovations
- Fund a down payment on another property
- Pay off higher-cost debt
- Build operating reserves
- Cover major property expenses
- Invest in another business or asset
The refinance increases the debt secured by the rental property regardless of how the money is used.
How Much Equity Do You Need?
A conventional cash-out refinance on a one-unit investment property generally requires at least 25% equity to remain after closing. A two- to four-unit property generally requires at least 30% equity to remain.
The corresponding maximum LTV limits are:
- One-unit investment property: 75%
- Two- to four-unit investment property: 70%
These limits are lower than the standard 80% maximum commonly available for a conventional cash-out refinance on a one-unit primary residence.
Equity Is Not the Same as Available Cash
Suppose a one-unit rental is worth $500,000 and you owe $300,000. The property has approximately $200,000 in gross equity.
At a 75% maximum LTV:
- Maximum new loan: $375,000
- Existing mortgage payoff: $300,000
- Difference before costs: $75,000
- Equity remaining after closing: $125,000
You could not generally withdraw the full $200,000 because at least 25% of the property value must remain as equity under the standard one-unit conventional limit.
Why Are Investment Property LTV Limits Lower?
A borrower facing financial stress may be more likely to prioritize the mortgage on a primary residence over a rental property. Rental income can also decline because of vacancies, nonpayment, repairs or local market conditions.
Lenders address this added risk through:
- Lower maximum LTV ratios
- Higher interest rates or pricing adjustments
- Cash reserve requirements
- Rental-income documentation
- Stricter treatment of multiple financed properties
A lower LTV leaves more equity in the property and reduces the lender’s exposure if the loan defaults.
What Are the Requirements for an Investment Property Cash-Out Refinance?
Credit
Your credit score and recent payment history affect eligibility, pricing and the maximum LTV available. There is no single score that applies to every investment-property refinance.
Investment-property loans generally require a stronger credit profile than comparable owner-occupied transactions, particularly when the loan has a higher LTV or the borrower owns several financed properties.
Income and Debt-to-Income Ratio
For a conventional refinance, the lender generally reviews your qualifying income and monthly obligations to calculate your debt-to-income ratio.
The calculation can include:
- Your primary-residence housing payment
- The proposed investment-property payment
- Payments on other financed properties
- Credit cards, auto loans and student loans
- Personal loans and support obligations
Eligible rental income may offset some or all of the investment property’s housing expense. The amount used depends on the lease, tax returns, appraisal and your history of managing rental property.
Rental-Income Documentation
The lender may document rental income through:
- Federal tax returns
- Schedule E
- A current lease agreement
- Rent receipts or bank statements
- An appraisal with a comparable-rent schedule
- A small residential income property appraisal for a two- to four-unit property
The lender may use only a percentage of the documented gross rent to account for vacancies and operating expenses. The exact treatment depends on the loan program and the documentation available.
Cash Reserves
Cash reserves are funds remaining after closing that could cover future mortgage payments and property expenses.
Fannie Mae’s automated underwriting guidelines generally require six months of reserves for an investment-property transaction. Additional reserves can be required when you own other financed properties.
Eligible reserves can include certain funds held in:
- Checking and savings accounts
- Money market accounts
- Investment accounts
- Retirement accounts, subject to applicable calculations
Cash-out proceeds from the transaction generally cannot be counted as the reserves required to approve that same loan.
Property Appraisal
An appraisal is generally required to determine the property value and calculate the LTV. The appraiser may also estimate market rent when rental income is used for qualification.
A lower-than-expected appraisal can reduce the maximum loan, lower the available proceeds or make the proposed refinance ineligible.
Ownership and Seasoning
Conventional cash-out refinances generally require the borrower to have owned the property for at least six months before the new loan is disbursed.
Limited exceptions can apply, including certain inherited properties, legally awarded properties and transactions that meet delayed-financing requirements.
Number of Financed Properties
Conventional guidelines limit how many financed residential properties a borrower can have for certain loans. The lender also considers the combined reserve requirement across the portfolio.
Owning multiple properties does not automatically prevent a refinance, but it can increase documentation and reserve requirements.
Are Investment Property Refinance Rates Higher?
Investment-property refinance rates and fees are generally higher than those for otherwise similar primary-residence loans. Cash-out transactions can also carry higher pricing than rate-and-term refinances.
Your rate and closing costs can be affected by:
- Credit score
- LTV ratio
- Property type
- Number of units
- Loan amount
- Fixed or adjustable rate
- Discount points
- Number of financed properties
Reducing the loan amount and retaining more equity can improve available pricing, but the effect depends on the lender and loan structure.
Can You Use a Cash-Out Refinance for the BRRRR Strategy?
BRRRR stands for buy, rehab, rent, refinance and repeat. The strategy involves purchasing and improving a property, placing a tenant, refinancing based on the completed property and using eligible proceeds toward another investment.
A cash-out refinance can support this strategy, but several limits apply:
- The appraised value may be lower than the investor expects.
- The maximum LTV limits how much equity can be withdrawn.
- Ownership seasoning rules can delay the refinance.
- Renovation costs may not be fully recovered.
- The property must generate enough qualifying income.
- The borrower must meet reserve, credit and income requirements.
Delayed financing may be available when the property was purchased without mortgage financing and the transaction meets conventional documentation requirements. The loan amount is tied to the documented purchase and financing structure rather than unrestricted access to the new appraised value.
Conventional Cash-Out Refinance vs. DSCR Loan
A debt service coverage ratio loan, or DSCR loan, generally qualifies the property based primarily on its rental cash flow rather than the borrower’s personal employment income.
The debt service coverage ratio compares eligible monthly rental income with the property’s qualifying monthly debt obligation. A ratio above 1.0 indicates that the measured rent exceeds the measured housing expense.
A DSCR loan may be an alternative when:
- Your tax returns show limited personal qualifying income.
- You own several rental properties.
- Your income is complex or largely self-employed.
- The property produces sufficient rent to support the proposed payment.
DSCR loans are non-qualified mortgages and follow lender or investor-specific rules. They can have higher rates, larger down payment or equity requirements, prepayment penalties and different reserve standards than conventional loans.
The available loans for investment properties also include conventional mortgages, portfolio loans, hard-money loans and other non-QM products.
Cash-Out Refinance vs. HELOC on an Investment Property
A HELOC adds a revolving credit line secured by the property while leaving the existing first mortgage in place. A cash-out refinance replaces the first mortgage and provides eligible proceeds through a larger new loan.
The main differences between a cash-out refinance and a HELOC on an investment property include:
- Whether the first mortgage is replaced
- Fixed versus variable interest rates
- Lump-sum versus revolving access
- Closing costs
- LTV and combined LTV limits
- Availability for non-owner-occupied properties
A HELOC can preserve a low first-mortgage rate, but investment-property HELOCs may be harder to find and can have lower combined LTV limits than owner-occupied products.
The broader differences between a HELOC and a cash-out refinance also include payment structure, draw periods and how interest is charged.
Is a Cash-Out Refinance on a Rental Property Worth It?
A cash-out refinance may be reasonable when:
- The property has enough equity to meet the lower investment-property LTV limit.
- The rental income supports the new payment.
- The proceeds have a defined use and expected financial return.
- You can meet the reserve requirement after closing.
- The new rate and closing costs fit the investment plan.
- You expect to hold the property long enough to recover the refinance costs.
It may be a poor fit when:
- The new mortgage rate is substantially higher than the current rate.
- The larger payment would leave little room for vacancies or repairs.
- The refinance would remove most of your accessible equity.
- You need the cash for ongoing operating losses rather than a defined investment.
- The closing costs outweigh the expected benefit.
- A HELOC, home equity loan or portfolio product would preserve better existing terms.
The Bottom Line
You can get a cash-out refinance on an eligible investment property, but the requirements are generally stricter than they are for a primary residence.
Conventional guidelines typically limit cash-out refinances to 75% LTV on a one-unit investment property and 70% LTV on a two- to four-unit property. You may also need six months of reserves, additional reserves for other financed properties and documentation supporting the rental income.
Compare the new rate, payment, closing costs and equity remaining after closing with the expected return from using the proceeds. A larger cash withdrawal can fund another investment, but it also raises the debt and risk attached to the rental property.
Frequently Asked Questions
Can You Cash-Out Refinance a Rental Property?
Yes. Conventional, portfolio and some non-QM loan programs allow cash-out refinancing on eligible rental properties. Qualification and maximum LTV limits depend on the property, borrower and loan program.
What Is the Maximum LTV for an Investment Property Cash-Out Refinance?
Conventional guidelines generally allow up to 75% LTV on a one-unit investment property and 70% LTV on a two- to four-unit investment property. Lenders may set lower limits.
How Much Equity Do You Need for an Investment Property Cash-Out Refinance?
You generally need at least 25% equity to remain in a one-unit investment property or 30% in a two- to four-unit investment property under standard conventional guidelines.
Do You Need Cash Reserves to Refinance a Rental Property?
Yes, reserves are commonly required. Conventional automated underwriting generally requires six months of reserves for an investment-property transaction, with additional reserves possible when you own multiple financed properties.
Can You Use Rental Income to Qualify?
Yes. Eligible rental income can offset some or all of the property’s mortgage expense. The lender may use tax returns, leases and appraisal forms to document the income.
How Long Must You Own a Rental Before a Cash-Out Refinance?
Conventional cash-out guidelines generally require six months of ownership before disbursement. Limited exceptions can apply, including delayed financing for certain properties purchased without mortgage financing.
Can You Cash-Out Refinance an Airbnb or Short-Term Rental?
Possibly. Eligibility depends on the property type, zoning, loan program and how the rental income is documented. Short-term rental income may not be treated the same as income supported by a long-term lease.
Can You Use the Proceeds to Buy Another Rental Property?
Yes. Cash-out proceeds can generally be used toward another investment-property purchase. The new purchase will have its own down payment, qualification and reserve requirements.
Is a DSCR Loan Better Than a Conventional Cash-Out Refinance?
A DSCR loan may work better when the property’s rental income is strong but your personal income is difficult to document. A conventional refinance may offer different pricing when you qualify through standard income and debt underwriting.
Are Cash-Out Refinance Proceeds Taxable?
Loan proceeds are generally borrowed money rather than taxable income. The tax treatment of interest and investment expenses depends on how the funds are used and current tax law. Consult a qualified tax professional for advice about a specific transaction.
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