Can You Get a Cash-Out Refinance on an Investment Property?

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 1-4 unit residential properties, the new value is based on the homes around it, not its income potential.

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 W2 job.

The lender will factor in other debts such as your primary residence. All housing and other debts must be no more than about 43% of your income.

Loan limits

Another less common cap for your loan amount is the local loan limit. You can get a loan up to $766,550 anywhere in the U.S. If you need a cash-out refinance higher than that, the property must be in a high-cost area as designated by Fannie Mae. Search your area here.

Reserves

You will need to show cash “reserves” (not including cash from the refinance) to qualify.

If you own 1-4 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 5-6 properties, you need 4% of all loan balances and for 7-10 properties, you need 6%.

As an example, someone with five rental properties with $200,000 loan balances each would have $1,000,000 in outstanding loans. They would need 4% of this amount, or $40,000 in reserve to qualify for the new cash-out refinance.

Rates

Fannie Mae has all but telegraphed that they would rather not finance rental properties. You can tell by their pricing.

For example, a 720 credit score borrower would pay 4.125 points above standard pricing for a 75% LTV rental property cash out loan. On a $200,000 loan, this would require an extra $8,250 in fees or a rate that’s about 1.5-2.5% higher than standard market rates.

Most lenders can’t raise your rate enough to cover these costs. You must pay them out of pocket or wrap them into the loan.

You might want to check out alternatives to conventional investment property mortgages, which are listed in the next section.

Alternatives to Conventional

With conventional investment property pricing, it’s a good thing Fannie Mae and Freddie Mac aren’t the only option. You may find better rates and terms with other programs.

DSCR loan: A debt service coverage ratio 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 could 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.

Line of credit: 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

• 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 the business of owning rental properties.

An affordable remodel, adding air conditioning, or improving curb appeal can increase your rental income and give you a return on investment.

Another good idea is to use cash-out proceeds for a down payment on another property. With $50,000, you could put 25% down on a $200,000 rental.

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.

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.