Cash-Out Refinance Investment Property: How It Works and Alternatives
A cash-out refinance investment property strategy allows investors to access equity by replacing an existing loan with a larger one and receiving the difference in cash. This allows investors to fund repairs, renovations, or acquire additional properties.
With a cash-out refinance of an investment property, real estate investors can access equity by replacing an existing mortgage with a larger loan. The difference between the new loan and the existing balance is received in cash, which the investor can use to acquire additional properties or finance renovations.
Although the concept is straightforward, the process can become complex when it comes to actually completing a cash-out refinance. Requirements tend to be stricter than primary residence refinances. Timelines also tend to be slower, which makes it difficult to move quickly on new opportunities.
Investors looking to use cash-out refinancing to scale a portfolio should understand when it makes the most sense and when alternatives like debt-service coverage ratio (DSCR) loans or bridge financing might be better suited.
What Is a Cash-Out Refinance on an Investment Property?
A cash-out refinance on an investment property occurs when an investor replaces an existing mortgage loan with a larger one. The difference is then received as cash.
For example, an investor seeking a $300,000 cash-out refinance on a property with an existing $200,000 mortgage would receive $100,000 in cash deposited into their bank account. They would then make payments based on the new terms of the $300,000 mortgage.
The process is similar to refinancing a primary residence. The main differences lie in qualification requirements and loan terms. Cash-out refinances of an investment property carry stricter eligibility criteria. Lenders often require:
- Lower loan-to-value (LTV) ratios.
- Higher credit scores.
- Proof of additional cash reserves.
Loan terms are also typically less competitive. This is partly because investment properties are higher risk, being non-owner-occupied, resulting in a greater likelihood that the owner may default on payments.
A cash-out refinance also differs from a home equity line of credit (HELOC). HELOCs are second liens on the property that provide a revolving line of credit where funds can be drawn over time. A cash-out refinance is a closed-end loan that does not allow for additional draws once the loan has been funded.
How a Cash-Out Refinance Works
A cash-out refinance has four distinct steps that must be completed. Understanding what occurs during each stage can help investors set realistic expectations for the lending process.
Property Appraisal
An appraisal of the property is done to determine its market value and condition. Notably, this is crucial in determining how much equity can be accessed based on the lender’s LTV limits, not the property’s purchase price or estimated value.
LTV Calculation
As a risk-management measure, lenders typically set LTV caps of 70% to 75% for investment properties. LTV can be calculated by dividing the loan amount by the property’s appraised value or sales price (whichever is lower).
Loan Replacement
Once the new loan is approved, funds are sent to the current mortgage to pay it off. The new loan essentially replaces the old loan, and investors will make payments based on the new loan’s interest rate and other loan terms.
Cash Payout
Once the old loan has been paid, the remaining funds are then disbursed directly to the investor. These funds can be used for a range of investment needs, such as acquiring new properties or funding renovations, as long as they adhere to the new loan agreement.
Example
An investor currently owes $200,000 on a property worth $500,000. They submit a loan application with a lender willing to finance up to a 75% LTV. The maximum amount the investor can receive is $375,000.
If approved, the investor would receive $175,000 in cash and make payments on the new $375,000 loan amount.
Cash-Out Refinance Requirements for Investment Properties
Cash-out refinance requirements for investment properties are stricter than those for primary residence refinances. This is because non-owner-occupied properties represent a greater risk of default. However, meeting minimum requirements does not guarantee approval, as lenders evaluate applications holistically.
Core Qualification Requirements
- Credit Score: Common requirements involve a minimum credit score in the mid-600s or higher. This is usually taken as the middle of the three major credit bureaus: Equifax, TransUnion, and Experian. Higher scores often lead to more favorable loan terms.
- Loan-to-Value Ratio: Many lenders cap the LTV at 70-75%. Lower LTVs can lead to more favorable pricing and increase approval odds by strengthening the loan application.
- Debt-to-Income (DTI) Ratio: Lenders calculate DTI to determine an investor’s ability to repay debt. DTI is calculated by dividing monthly debt obligations by an investor’s monthly income.
- Property Type and Condition: Single-family properties are the easiest to finance. Multi-unit homes, condominiums, and planned unit developments (PUDs) carry additional layers of risk and can require additional due diligence review by a lender. Regardless of the property type, it must be in good condition and be able to generate stable rental income.
- Seasoning Requirements: Many lenders will require an investor to have owned the property for at least 6-12 months before being eligible for a cash-out refinance. Some exceptions may apply, such as if the property was inherited or acquired as part of certain legal proceedings.
What Actually Impacts Approval and Success
Beyond meeting minimum lender requirements, real estate trends and market conditions play a crucial role in loan approvals. For instance, market conditions impact property values and market rents. These are critical factors that lenders take into consideration.
Ultimately, total usable equity plays a key role in determining how much funding an investor can receive. Lenders also evaluate cash reserves and overall portfolio leverage when determining approval, available cash-out, and final loan terms.
Example: Investor A vs. Investor B (Comparison Scenario)
To see how loan approvals and terms could play out, let’s consider two investors, one with a strong profile and the other with a weaker profile.
Investor A (Strong Profile):
This investor owes $300,000 on a home worth $500,000 — a 60% LTV. They have an 800 credit score and a two-year history of consistent rental income, with the property located in a stable rental market.
The outcome for this investor is likely:
- An easier approval process.
- More favorable loan terms.
- The ability to get a greater cash-out.
Investor B (Weaker Profile):
Our second investor owes $400,000 on a similar home worth $500,000 — an 80% LTV. They have a 650 credit score, less than 1 year of rental income, and the property is located in a volatile rental market.
The likely outcome for this investor is:
- A more difficult approval process, with more paperwork and a longer approval timeline.
- A lower cash-out.
- Less favorable loan terms.
Cash-Out Refinance vs. DSCR Loans vs. Hard Money Loans
A cash-out refinance is one way to get access to additional capital, but it may not always be the best option. Other smart ways to refinance investment loans may offer access to capital more quickly or at a lower cost.
To compare additional structures, review the best loans for an investment property.
As an example, below is a quick summary table comparing cash-out refinances to two other common alternatives: DSCR loans and hard money financing.
| Factor | Cash-Out Refinance | DSCR Loan | Hard Money |
| Speed | Slow | Fast | Very Fast |
| Flexibility | Low | Medium-High | High |
| Qualification | Strict | Moderate | Flexible |
| Best For | Equity access | Scaling rentals | Quick deals |
Alternatives to Cash-Out Refinancing
A cash-out refinance can be efficient, but it may not always be the best option depending on an investor’s qualifications, needs, preferences, or goals. DSCR, fix-and-flip, and portfolio loans can offer some benefits over a traditional cash-out refinance.
Across these options, flexibility and speed are areas where specialized lenders like LendingOne can support investors more effectively than traditional lenders.
Investors focused on long-term growth can explore advanced real estate investment loans for scalability.
DSCR Loans
DSCR loans for real estate investors can offer an easier path to qualification as they focus on the property’s ability to generate income, rather than an investor’s personal income. This can reduce income verification paperwork, simplifying the process and expediting approval and funding.
Since qualification is tied to cash flow, DSCR loans are well-suited for investors looking to scale. DSCR loans allow for faster closings and more consistent, repeatable processes across multiple properties.
Fix-and-Flip Loans
Investors commonly use fix-and-flip loans to acquire, renovate, and repair properties before reselling for a higher sales price. These loans can be funded quickly and allow investors to secure deals that may otherwise be lost during the longer timeline of a traditional cash-out refinance.
Portfolio Loans
Portfolio loans consolidate the debt for multiple properties into a single loan. Instead of refinancing properties individually or making separate payments, investors can streamline these items into a single loan. This can simplify finances for investors who have multiple properties.
How LendingOne Helps Investors Maximize Cash-Out Refinancing
LendingOne helps investors access equity through financing solutions designed specifically for investing. Rather than taking a one-size-fits-all approach, LendingOne can help evaluate the best way to access equity based on your investment strategy.
Explore loan options to evaluate which financing structure aligns with your goals.
LendingOne’s team knows that time is of the essence for all real estate transactions. As such, the company provides streamlined processes to eliminate delays by emphasizing consistency, repeatability, and predictability through each stage of the loan process.
LendingOne also provides a wide range of financing options – including DSCR loans, fix-and-flip financing, and portfolio lending.
Connect with a LendingOne advisor today to see which structure best fits your timeline and growth goals.
FAQ: Cash-Out Refinance Investment Property
Are There Tax Implications With a Cash-Out Refinance on an Investment Property?
Cash received from a cash-out refinance is generally not considered taxable income because it is borrowed money. However, refinancing can affect interest deductions and broader tax planning, so investors should always consult a qualified tax professional.
How Long Does a Cash-Out Refinance on an Investment Property Typically Take?
A cash-out refinance on an investment property often takes 30 to 45 days, though timelines vary by lender, appraisal scheduling, underwriting complexity, and document readiness. Investment property refinances may take longer than primary residence refinances because requirements are usually stricter.
What Is the Seasoning Requirement for a Cash-Out Refinance on an Investment Property?
Most lenders require an investor to have owned an investment property for 6-12 months before being eligible to complete a cash-out refinance. Some exceptions may apply, such as when the property was acquired through an inheritance or other legal proceedings.
Can I Use a Cash-Out Refinance to Buy Another Investment Property?
Yes, unless specifically prohibited by the terms of the new cash-out loan, investors are generally free to use the funds for a variety of purposes, including purchasing a new property or funding renovations.
