When a rental property goes up in value, that extra value sitting inside the property doesn’t do anything for you on its own. You can’t spend it, and you can’t use it to buy your next property, unless you either sell the home or borrow against it.
A sale gives you cash, but it also means giving up the property, the tenant, and any future rent it might earn, and the profit is usually subject to capital gains tax. A cash-out refinance is the other option. It lets you keep the property and pull out some of its value as cash, which many investors then use as the down payment on their next purchase.
For that reason, cash-out refinancing has become one of the more common ways investors grow a rental portfolio without saving up a full down payment for every new purchase. The idea matters just as much for real estate agents advising investor clients as it does for the investors themselves.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your current mortgage with a new, larger loan on the same property. At closing, the new loan pays off the old one, and you receive the difference in cash. Nothing else about the property changes: you keep it, and if it’s rented, the tenant keeps their lease.
This works for traditional long-term rental homes as well as short-term rentals, including Airbnb properties. Most lenders that offer this type of refinance use a loan called a DSCR loan, which qualifies you based on how much rent the property brings in, rather than your personal income or tax returns. The structure behind a cash-out refinance works the same way whether the loan is for a purchase or a refinance: the lender looks at the property’s cash flow, not your income.
Why Regular Mortgages Have a Limit
If you apply for a normal, or conventional, cash-out refinance, the lender qualifies you the same way they would for any other mortgage. They look at your income, your tax returns, and every mortgage payment you’re already responsible for. As a result, each new rental property you finance adds to that pile of monthly payments, and at some point, the math stops working. Most conventional lenders won’t approve you once your monthly debts, including every mortgage you carry, add up to more than about 40% of your income.
However, that isn’t the only way to qualify for financing. A DSCR loan takes a different approach: it looks at whether the property’s rent covers the new payment, not whether your personal income can. Because of this, an investor with one rental property and an investor with ten rental properties can both qualify the same way, as long as each property earns enough rent to cover its own loan.
How Much Cash Can You Actually Get?
Most lenders will let you borrow up to 75% of what the rental property is currently worth, based on a new appraisal, not what you originally paid for it. To figure out how much cash you’d actually walk away with, take that maximum loan amount, subtract what you still owe on your current mortgage, and subtract your closing costs.
Here’s what that looks like on a property worth $600,000, with $280,000 left on the current loan.
|
Appraised Value |
$600,000 |
|
Maximum Loan at 75% of Value |
$450,000 |
|
Existing Loan Payoff |
$280,000 |
|
Estimated Closing Costs |
$12,000 |
|
Cash to Investor |
$158,000 |
The exact number depends on your appraisal, your current payoff amount, and your lender’s fees. But the pattern holds: the more the property has gone up in value, and the more you’ve paid down the loan, the more cash you can pull out.
How to Choose the Right Lender
Not every lender offers this type of loan, and the ones that do aren’t all the same. A few questions are worth asking before you commit to one.
Does the lender fund the loan themselves, or do they pass your file to a separate company? A lender who funds the loan directly can usually move faster and give you firmer numbers upfront. Do they work with both long-term rentals and short-term rentals, or only one? Do they require personal income documents, or do they qualify you based on rental income alone? How many states do they actually lend in, and is yours one of them? How fast can they close, and will they put those numbers in writing?
Ridge Street Capital, for example, is a direct lender that funds cash-out refinances on both long-term rental properties and short-term rentals across 35 states, without requiring personal income documentation. Lenders vary on all of these points, so it’s worth confirming each one directly before deciding who to work with.
Risks and Trade-Offs to Understand First
A larger loan means a larger monthly payment, which means less rental income left over each month. That trade-off doesn’t go away just because you put the cash to good use elsewhere. Before refinancing, it’s worth weighing the income you’d give up against the return you expect from whatever the cash funds, whether that’s a down payment on another property, a renovation, or the payoff of higher-cost debt.
It’s also possible that the new rate ends up higher than what you’re paying now, even on a strong deal, since rates on cash-out refinances tend to run a bit higher than on refinances that don’t pull cash out. Check the new monthly payment before you focus on the amount of cash you’d receive.
Also worth checking: many rental property loans include a penalty if you refinance again or sell within the first few years, typically three to five. If you might sell or refinance again soon, that penalty can eat into what you gain from doing it now.
Finally, the biggest possible loan isn’t always the right choice. If the new payment leaves little room above what the property actually earns in rent, a single vacancy or an unexpected repair can put you in a tight spot. A comfortable buffer between the rent and the payment protects you if something goes wrong, even if it means taking a little less cash today.
