In 2024, many real estate investors are opting to cash-out refinance investment property as a strategic move to unlock equity.
A cash-out refinance on an investment property allows you to replace your existing mortgage with a new, larger loan, providing you with a lump sum of cash that can be used for various purposes.
Whether you’re looking to make home improvements, expand your real estate portfolio, or invest in your LLC’s growth, a cash-out refinance can provide the capital you need to take your investment strategy to the next level.
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A cash-out refinance on an investment property is similar to a traditional cash-out refinance, except it involves a property that is not your primary residence.
This type of loan allows you to access the equity you’ve built up in your investment property by replacing your existing mortgage loan with a new, larger loan.
The difference between the new loan amount and the outstanding balance on your current mortgage is given to you as a lump sum of cash, which you can use for various purposes, such as making improvements to the property, purchasing additional rental properties, or consolidating debt.
Typically, lenders allow you to borrow up to 75%–80% of your property’s value. Although the amount of equity you can access through a cash-out refinance on your investment property depends on several factors, including your lender’s requirements, your property’s value, and your creditworthiness.
When it comes to cash-out refinancing, lenders typically define an investment property as a real estate asset purchased primarily to generate rental income or profit from market appreciation. Investment properties that may qualify for a cash-out refinance include:
Second homes and fix-and-flip properties generally don’t qualify for an investment property cash-out refinance because they are not primarily used for generating rental income and may not meet lenders’ criteria for seasoning and property valuation.
Eligibility to cash-out refinance investment property requires both homeowners and their properties to meet specific lender criteria that ensure financial stability.
Most lenders require a minimum credit score of 620–680 for a cash-out refinance on an investment property, although some may require scores as high as 700.
Lenders typically require borrowers to have cash reserves equivalent to 6–12 months of mortgage payments after the refinance. You may also be required to hold cash reserves equal to 2% to 6% of any unpaid loan balances on properties other than the one being refinanced and your primary residence.
To qualify for a cash-out refinance on an investment property, you’ll need to have sufficient equity in your home. Equity is the difference between the current value of your home and your outstanding mortgage balance.
Lenders typically require a minimum of 20–30% equity in the property to approve a cash-out refinance. This means your new mortgage loan amount cannot exceed 70–80% of your home’s appraised value.
The maximum LTV for a cash-out refinance on an investment property is usually 75%–80%, depending on the lender and the type of rental property.
If you recently purchased your investment property, some lenders may require a waiting period or “seasoning period” (usually 6–12 months) before allowing a cash-out refinance.
Lenders generally prefer a DTI of 36% or lower for investment property cash-out refinances, although some may allow up to 45% with compensating factors.
The investment property must typically be in good condition and meet the lender’s appraisal requirements to qualify for a cash-out refinance.
To be eligible to cash-out refinance an investment property, the owner cannot permanently occupy the property. In other words, the property should be rented out to tenants or used as a second home that is not the owner’s primary residence. Lenders may require proof of rental income or a signed lease agreement to confirm the property’s investment status.
Cashing out equity from your investment property can be a smart way to access funds for renovations, additional investments, or other financial goals.
Mortgage interest rates for a cash-out investment property loan tend to be higher than other loan programs.
Still on the fence about whether cashing out equity is right for you? Here are four reasons why it can be beneficial to cash-out refinance investment property.
Cash-out refinancing unlocks your property’s appraised value, allowing you to invest in upgrades that enhance the tenant experience and potentially increase market value.
Refinancing may adjust your mortgage terms, consolidating higher-interest debts. This can result in more manageable finances and potential tax benefits.
Unlocking equity through a cash-out refinance can help your LLC grow its real estate portfolio or finance home improvements to attract higher-paying tenants.
For example, if you have a rental property worth $250,000 with a loan balance of $150,000, you could cash out up to 75% of the current value, netting around $37,000 to purchase new rental properties.
Cash-out refinancing prepares investors for market shifts by locking in a mortgage based on its current value, providing liquidity for new opportunities.
When considering ways to leverage your property’s value, you might think about a cash-out refinance on your investment property. This financial move can open new opportunities but comes with its drawbacks. Here’s what to weigh before diving in:
Before cash-out refinancing an investment property, carefully consider the pros and cons to determine if it aligns with your financial goals.
While opting to cash-out refinance investment property is a popular choice for many investors seeking to tap into their property’s equity, it’s by no means the only strategy available.
A HELOC is a revolving line of credit secured by your home that functions similarly to a credit card. During the draw period, you can borrow money up to a limit and pay interest only on the borrowed amount, providing flexibility without refinancing your current mortgage.
A home equity loan is a second mortgage that provides a lump sum of cash based on your property’s equity while leaving your current mortgage intact. This option is beneficial for those with a favorable interest rate on their primary mortgage.
For those not wishing to cash-out refinance investment property, a personal loan could be a consideration. Personal loans are based on creditworthiness rather than home equity and can offer a quick source of funds without using the property as collateral. However, they often come with higher interest rates compared to secured loans.
Investment property owners may consider peer-to-peer lending or private financing as alternatives to cash-out refinancing. These options can provide competitive lending without the strict requirements or lengthy processes of traditional bank financing.
“Delayed financing” refers to buying a home with cash, then reimbursing the purchase with a refinance. Because there are no loans on an all-cash purchase, any subsequent refinance is a cash-out one.
Yes, property owners can release equity from a rental property through a cash-out refinance. This involves replacing the existing mortgage with a new loan amount that includes the equity being withdrawn.
What is the max LTV on an investment property?The maximum LTV for an investment property purchase is 80–85%, requiring a 15-20% down payment. For a cash-out refinance on an investment property, the maximum LTV is typically 70–75%, depending on the lender and loan type.
How much are closing costs on a cash-out refinance?Closing costs on a cash-out refinance range from 2-5% of the new loan amount, similar to a traditional refinance. These costs include fees such as origination and underwriting, but not real estate agent commissions.
Should I cash-out refinance investment property to pay off debt?Using a cash-out refinance on an investment property to pay off high-interest credit card debt can be a smart move, as it consolidates debt under a mortgage with a lower interest rate. However, suitability depends on factors like equity amount, credit score, and debt-to-income ratio.
Is it hard to refinance a rental property?Refinancing a rental property can be more challenging than refinancing an owner-occupied primary residence due to stricter credit requirements and LTV ratios. While options may be more limited, many property owners find it achievable with research and shopping around.
Can I use an FHA loan to cash-out refinance investment property?No, FHA loans cannot be used to cash-out refinance an investment property. FHA loans are exclusively available for owner-occupied primary residences. A conventional loan is required to cash-out refinance an income-earning property.
As you consider the potential financial benefits of cash-out refinancing your investment property, remember that the right lender can make all the difference in maximizing your return.
Don’t leave money on the table. Take the first step towards unlocking your property’s equity and empowering your financial strategy.
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Authored By: Tim Lucas The Mortgage Reports EditorTim Lucas spent 11 years in the mortgage industry before moving into the world of digital media. He's helped thousands of families buy and refinance real estate at banks and mortgage companies and now continues that mission through industry-leading content. Tim has been featured in national publications such as Time, U.S. News and World Report, MSN, Scotsman Guide, and more.
Updated By: Ryan Tronier The Mortgage Reports EditorRyan Tronier is a personal finance writer and editor. His work has been published on NBC, ABC, USATODAY, Yahoo Finance, MSN Money, and more. Ryan is the former managing editor of the finance website Sapling, as well as the former personal finance editor at Slickdeals.
Reviewed By: Paul Centopani The Mortgage Reports EditorPaul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.