A cash out refinance is one of the best tools an investor can use to take money out of their rental properties. One of the biggest roadblocks an investor runs into is finding the cash for down payments on new rental properties. A cash out refinance is a great way to get cash to buy more properties. When I purchased my first long-term rental, I was able to buy the property from proceeds that came from a cash out refinance on my personal residence. I was able to take out $40,000 in equity from my personal house, only one year after I bought the home. I have also refinanced four rental properties, which has allowed to buy more rentals and I now have 16 rental properties total.
I was able to use the money from the cash out refinance to buy a rental property that provided a 20% cash on cash return. In my complete guide to investing in long-term rentals I detail how I get these returns, how I find properties, how I finance them and list the numbers.
Why do increasing values make it easier to complete a cash out refinance on rental properties?
Values are going up across the country, and that has created an opportunity for home owners to do a cash out refinance. Most banks are using stricter guidelines for qualifications and lower loan to value ratios than five years ago. However, if you bought your home at a great price or have owned it for a while, you still may be able to do a cash out refinance. Many banks will require an 80% or lower loan to value ratio when refinancing a rental property and they will use an appraisal to determine that value. It is imperative that you have a lot of equity in your property if you want to complete a cash out refinance with an investment property. If you are refinancing an owner occupied home, you may be able to refinance up to 95 percent of the value.
What are the risks of a cash out refinance on a rental property?
A cash out refinance will increase the amount of the loan you have on your rental property. For some people who are averse to risk, paying off their home is a great option and they may not want more debt. However, I am not averse to risk and I want to maximize my returns. I talk about why it may not be a good idea to pay off your personal residence in this article. Debt can be a very bad thing if it is used for the wrong things, but if you use debt to buy cash producing investments it can be a great thing!
In my market I can get a cash on cash return of 20 percent or higher on rental properties, while interest rates are below 5 percent. It makes more sense to me to refinance for 5 percent and use that money to buy properties that will give me over a 20 percent cash on cash return! That 20 percent return does not even include possible appreciation, tax benefits or mortgage pay down.
Yes, it is possible that values could go down and a cash out refinance would reduce the equity in your home. If you don’t need to sell your home, then it will not matter how much equity you have in your home. However, if you are pushing how much you can afford with a monthly payment it may not be wise to refinance if it increases your payment. If you have a lot of cash flow and are comfortable with a higher payment, use that money to make more money. If you are wondering if you can afford your personal house payment now, read this article.
If you increase your debt with a refinance, then you may be decreasing the amount you can qualify for on future homes. If you max out the amount of money a lender will loan to you with a refinance, then you won’t be able to get a loan on a new rental property. Before you refinance make sure you know how much you will be able to qualify for.
When you refinance, there will be similar costs to getting a new loan. You may have to pay 2 to 3 percent in closing costs, which can add up to a lot of money on higher valued loans. Make sure paying those costs it worth it.
How does a cash out refinance work on rental property?
I did a cash out refinance on one of my rental properties in December of 2012 (I am doing another two in 2015) and I was able to pull out about $26,000 with my payment only going up $136 a month. The terms are usually more restrictive and it can be difficult to refinance if you have more than four mortgaged properties. I was able to do a cash out refinance with more than four mortgages because I used a portfolio lender.
When I did a cash out refinance on my investment property, the max they would lend was 75 percent of the value of the home. I also could only do a 5 or 7 year ARM or a 15 year fixed loan. I chose the 7 year ARM because I plan to pay off my homes quicker than the 7 year fixed term and the rates and payments are lower than the 15 year loan.
I first purchased rental number 2 in October of 2011 for $92,000 and put about $18,000 into it for repairs. I was able to turn it into a 5 bed, 2 bath and rented it for $1,100 (low because it is rented to my brother-in-law). I had to wait a year to do a cash out refinance and the current value was determined by an appraisal. The appraisal came in at $140,000 which I thought was low, but I had to go with it. After all the lender fees, interest and miscellaneous costs of the cash out refinance, I was able to cash out over $26,000. My payment went up $136 a month, but I am still able to cash flow every month and I took out more than enough money for a down payment on another rental property.
Conclusion
The more properties you can buy, the more cash flow builds up and the more wealth you can create. A cash out refinance can help you purchase more properties and increase your wealth. Make sure the houses you purchase are bought below market value, and it will make a future cash out refinance much easier. Make sure your payments are not so much that your are no longer seeing positive cash flow every month. If you have any other questions on how a cash out refinance works, please visit our discussion forum!
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.
I am interested in refinancing a high-priced, high equity rental in order to consolidate all my debt there. I am thinking of doing this because I do better do the Standard Deduction than with a Schedule A. That is, tax advantages if debt is higher on the rental, esp. in these turbulent times. I owe $410,000 on a $1.5 million property and $166,000 on our personal residence (between the two quite a bit of equity). I hate paying taxes but I don’t want to go to the extreme of cutting off my nose to spite my face. Any thoughts?
I think you have to look at the numbers and see what makes more sense. I do not care about how much I pay in taxes, I care about what I have left over after I pay taxes.
Hi Mark,
I have an investment property which has equity of $100 k . Can I refinance and take cash out of $80 k. Can I use this cash of $80 k to pay heloc on my primary home. Will there be capital gain tax I have to pay if I use the cash to pay off Loan on my primary home .
No tax if you refi. Why do you want to borrow against your rental to pay off your primary?
Hi Mark,
When refinancing, is your mortgage loan amount for the full appraised value ($140K) or is it for 75% of the appraised value ($105K)? In other words, are you refinancing into a $140K mortgage or a $105K mortgage and are your payments amortized by $140K or $105K?
Thanks!
75 percent of the appraised value
how long does the process take. They told me 3 to 6 months on my fully paid off 3 unit rental property in good condition
should take 30 to 45 days
Hi Mark,
Thanks for the article! I am looking to do a cash-out refi on our income property to pay for some repairs/upgrades before we put that property on the market. Can you shed any light on how this refi might effect capital gains tax we will owe after the sale? the property has tripled in value since we bought it 15 years ago. Thanks
refi will not affect cap gains, except the expenses of the loan may affect some of the profit.
I am purchasing a rental that is owner financed. However I will need to do extensive repairs. Is it possible to get a loan while rehabing the house?My thought was that since I am purchasing for way below market value I could get a loan for the total property and not even do the owner finance. But I would need some cash to do the rehab. Is this possible ?
Thank you,
This obviously is my first rental purchase. Also is there a problem if the renters are family?
You may be able to do that with hard money
I have 6 rental properties and can’t seem to find a lender to get them refinanced. The loans on the properties are all under $30k each. Any suggestions??
It is really hard to finance properties with loan amounts that low. I would try local lenders
The numbers don’t make sense. You bought at 92k put in 18k, appraisal at 140k 75% of that is 105. How did you get 26k out? even if you put every penny into the home for principle that’s still about 13k @ 1100/M making it 26k but at rental at 1,100 including tax, insurance. not to mention covering the closing costs of the initial purchase. Mainly getting 26k after all Fee’s can’t be correct math.
Hi Ryan, 92k x .8 = $73,600 loan amount. $105k – $73,600 = $31,400 minus fees for closing costs, escrow for insurance and taxes and interest. Some of those fees I got back because of escrow and I skipped a months payment. I think you are missing that I put 20 percent down, it has nothing to do with rent collected.
I owner occupy a duplex in Austin Texas. I owe 1/5 the value with a primary and a small equity. My credit is excellent. My income qualifies me for a substantial amount. Two lenders refused to give me a cash out loan due to Texas law re. ‘Owner occupied’ duplex with equity loan. Both loans are more than 15 years old. Do you know of any other options for me to get cash out of this property?
I have never heard of that, but I am not in texas. Try talking to a local lender if you can find one.
own a lot of fourplexes outright but want to finance them to cash out. where can i go for mortgages
Try local lenders! https://investfourmore.com/2013/05/12/how-to-find-a-portfolio-lender-who-will-finance-multiple-investment-properties/
Very helpful information for real estate investors, Mark. Thanks for writing about cash out refinance..
Hello Mr Ferguson, i have a question. I purchased a 3 family building 3years ago for 620K, i have 550k balance on a 30 year mortgage. Today the value went up dramatically and its worth 1.2 mil. does it make sense to refinance and if yes how much will i get. Thank you
That all depends on the numbers and what you use the money for. Most banks will only refi up to 70 or 75% of the value.
Mark do you have any insight on foriegn investors? I have a rental property that I tried to refinance but as a Canadian was unable as they would only lend if it was a 2nd home.
This was via RBC using their US division. My understanding is this is their own rules and not mandated.
That is true. There is no law about that, but many banks have issues with lending to foreigners. I would try local banks in the area your properties are located.
Thanks for the repost Mark, I re-read again, as it’s now pertaining to me at the moment, I m working with the bank to do a rental refi at the moment, looking to get some money out to potentially make a down payment, but just to add; there’s going to be a refi bank fee (for 35k they looking to charge me ~1.5k) and they also take long fixed terms as well. But like you mention, numbers and the rates are low enough, where you can take out cash and allocate to get better returns on your next investment. Cheers!
Yes, there will be fees whenever you refi just like a mew loan. Thank you for the comment!
question does a agent come out to look at the property?
Not an agent, but many times an appraiser will.
I am wanting to refinance a rental property. But my local banks want refinance a rental property only primary residences. Do you have a list if companies that will refinance rental?
Many banks will refi a rental. You have to keep calling and keep trying.
Mark, I own 3 properties earning 5k in rent each month. Only one house has a mortgage. I’m considering doing a cash out refi and buy another home. But will this affect me getting a va loan on another home in 6 months? I don’t want to jump the gun on buying a rental and be stuck without buying a home for myself once I move in 6 months. I am in the Army.
I would check with a lender first and see what they say. It would all depend on your debt to income.
Hi Mark, My goal is to buy as many properties as possible. I have 2 right now, free and clear! Nothing owed, paid cash. I want to buy more and use these as collateral for new loans. They are both rented and generate about $2,500 per month. Together they are appraised at about $150,00′, ny suggestions?
Hi MIke, That is a pretty good ratio for rent to value. I would talk to a local lender and see if they will refiance them for you. If you can refinance them at 75% of value that would give you over $100k to buy more.
Hi Mark, so another question…I am “applying” for a refinance on an investment property. Depending on the terms should I accept or should I shop around? With that refi $ I plan to pay off the loan on the investment property and pay off my own home. At which time I will VERY shortly apply for a new investment property loan with 20% cash down on that as well. The first refi lowers my monthly payment by $500 per month. I plan to do this all within a months time period because the new home is not going to be available for long! Will the bank that I am applying for the next loan frown on this quick transaction? Do I have to wait before a bank will allow me to use my home as equity or will I be able to use that for a future refi to pay off the new loan? My debt to income ratio is very good and credit rating 🙂 IT’s TIME!
Hi kim, This sounds very complicated. Why not refi your investment property and not pay off your personal house now? Unless your interest rate is really high.
Hey Mark,
I’m currently in the process of Cash-Out Refinancing my duplex. There’s a lot of equity on the duplex since I bought it cash 2 years ago. I plan to use the money to purchase 2 properties cash ranging $45K – $55K separately. My question is: how soon will I be able to used the cash-out refinance? Will I have to wait a year? I live in Pennsylvania.
Hi Ayo,
As soon as you do the cash out refi you can use the cash, but you may have to wait a year after you bought the property to do a cash out refi
Great article, If I have 4 investment property and want to get cash out on every one of them and put it in my bank to use for more investment property or whatever else I may want to use it for or even just leave it in the account as capital cash. Will the IRS have anything to say about that? Wasn’t sure if there’s any legal issues about doing that? Thank You
Hi Juan,
Always check with a lawyer or accountant, but a cash out refi is not taxable. You are not taxed on refinancing only sales. As long as the banks doing the refinances know about all the other refinances and you aren’t trying to do them all the same day there should be no problem.
Excellent article. Thank you! What are your thoughts on HELOC vs HEL vs Cash-Out? I read your HELOC article and it mentions that even without drawing it will still be considered debt on a credit report. From a DTI standpoint, do lenders see these three forms of cashing out differently?
Hi Skye, I think they would all be considered the same, since you could at some point pull the full amount of the lines out.
Why do you have to wait a year before doing a cash out refinance?
Hi Bob, those are the guidelines with my lender and most lenders. There are some out there who will do it sooner, but they are very difficult to find.