Getting a Cash-Out Refinance on Your Rental Property

cash out refinance

Do you feel like your income from your rental property is sleeping? Consider cash-out refinancing, it’s like a caffeine jolt that can wake up the trapped cash from your investment.

With homes standing tall in value and lenders who are ready to lend money to investors who understand their finances. This could be the perfect time to leverage your real estate assets.

By using your property’s equity, you can improve your property, reinvest in your portfolio, and keep your assets working.

In this blog, learn more about cash-out refinance on rental property, how it works and how to get qualified for this financing option.

I’ve been in this business for 20 plus years and what I’ve learned is, more opportunities are available for those who have the knowledge and means to capitalize on them.

Key Takeaways:

  • Cash-out refinancing allows property owners to replace their existing mortgage with a larger loan by tapping into the equity of their rental property, providing liquidity for various uses.

  • This financing method offers potential tax deductions and can increase property value through improvements, but carries risks like higher debt and potential foreclosure.

  • Approval depends on a good credit score (ideally between 680 and 700), sufficient cash reserves, and a favorable loan-to-value (LTV) ratio.

  • Choose a specialized lender, obtain a professional property appraisal or real estate broker, and prepare detailed financial documentation to ensure a smooth refinancing process.

  • Refinanced cash can be used to enhance property appeal through renovations, diversify investments, or expand your real estate portfolio, enabling long-term growth and stability.

What is Cash-Out Refi on Rental Property?

A cash-out refinance on rental property is when the owner replaces their old mortgage with a new bigger loan. This loan can use your equity in the property, allowing you to turn it into liquidity.

The process starts by appraising the property to determine its market value. Then the borrower will apply for a new loan that exceeds the current mortgage.

This loan can use to pay off the old mortgage and receive the difference in cash. They can use this cash for various purposes, such as additional investments, renovations, and other expenses.

This type of financing can leverage assets and consolidate debt. However, you need to carefully review the new loan terms. Also, its effect on your cash flow, to ensure it aligns with your financial goals.

Pros and Cons of Refinancing a Rental Property

Refinancing a rental property comes with benefits and drawbacks. Here are the advantage and disadvantage of doing a cash-out refinance on rental property:

Advantage and Disadvantage of Cash-Out Refinance Rental Property

Fannie Mae and Freddie Mac Cash-Out Refinancing

Fannie Mae and Freddie Mac are like the twin towers of finance, standing tall in the real estate landscape. They offer a safety net with guidelines that let investors tap into property equity without rolling over.

If considering a cash-out refinance, these government-sponsored enterprises could serve as your gateway to accessing reinvestment capital.

Fannie Mae cash out refinance guidelines, allow up to 75% loan-to-value ratios for single-family investment properties. Loans that conform to these guidelines usually offer better interest rates and terms. While Freddie Mac may approve similar loan-to-value (LTV) ratios.

Additionally, Fannie Mae offers unique refinancing options like “Delayed Financing,”. This type of financing allows investors to refinance shortly after an all-cash purchase.

This financing is ideal for those who need to act quickly to secure an investment. It bypasses the traditional six-month waiting period typically required before refinancing a property.

Things to Know Before Refinancing a Rental Property

Refinancing a rental property can be a strategic move to lower your mortgage rate. However, meeting the eligibility criteria is crucial for approval. Here’s what you need to know to prepare for a successful refinancing application.

Credit Score Benchmarks

Having a good credit score is essential in the refinancing process. Lenders typically look for a FICO score ranging between 680 and 700, indicating financial reliability and good credit management.

This score help lenders to feel confident on your capacity to handle the new loan terms. If your score is below 680, consider improving it by paying off your debts and keeping your credit card balance low.

These actions demonstrate to lenders your dedication to maintaining financial health and managing loans responsibly.

Sufficient Cash Reserves

Lenders also assess your financial resilience by looking at your cash reserves. Ideally, you should have up to 12 months’ worth of expenses in cash reserve.

This can cover unexpected costs like property repairs, tenant vacancies, or other emergencies without jeopardizing your mortgage payments.

Demonstrating the ability to foresee and prepare for potential financial setbacks makes you a more appealing borrower. Tools like Stessa can aid in tracking your financials, ensuring you’re always prepared for lender evaluations.

Loan-to-Value (LTV) Ratio

The loan-to-value ratio (LTV) is another critical factor in the refinancing process. To secure approval for a cash-out refinance on a rental property, keep your LTV ratio under 70%.

This ratio helps lenders evaluate how much equity you have in the property versus the amount borrowed. A lower LTV ratio means more equity and less risk for the lender, enhancing your chances of approval.

Tax implications of Cash Out Refinance Rental Property

Cash-out refinance for rental property comes with a benefit such as tax advantages. A real estate investor can enjoy tax deductions, making mortgage payments less painful at the end of the year. However, it is advisable to consult with a tax professional first.

Cash-out refi for rental properties allows you to get money from the increased value of the asset, without selling it.

You’ll also find yourself building wealth through real estate quicker than traditional saving methods. But remember, there’s a risk of foreclosure and dangers in this kind of financing.

How to Apply for a Cash-Out Refinance on Rental Property

Applying for a cash-out refinance on rental property can be a strategic move to leverage your investment. Here’s a step-by-step guide to ensure a smooth process:

How To Secure a Cash-Out Refinance on Rental Property

1. Choose the Right Lender

Select a lender who specializes in investment properties and understand your unique needs. Choose a lender that aligns with your investment goals and has experience with this type of financing.

With eFunder’s cash-out refinancing solutions, you can leverage your property’s equity for expansion, renovations, or new investments.

2. Obtain an Accurate Appraisal

The amount you can refinance depends on your property’s appraised value. Consider to have a professional appraisal or real estate broker to determine the current market value of your property.

This will dictate how much equity you can access. Just remember, if you order your own appraisal, the lender may still require you to pay for another ordered by them.

3. Gather Necessary Documentation

Prepare all the required documents that lenders typically need for a cash-out refinance. This can include proof of income (tax returns, bank statements), corporate documents (EIN, Articles of Organization, Operating Agreement), property management documents, tenant leases (if applicable), and detailed financial records of the property.

4. Apply for Rental Property Cash-Out Refinancing

With your documents in hand and a lender chosen, submit your application for a cash-out refinance. Your application will be reviewed and underwriting will assess your financial health and the income potential of your rental property.

5. Lock Down the Interest Rate

Process your application and then lock in the interest rate for your new loan. This will protect you against market fluctuations that could increase your costs during the underwriting process.

6. Proceed with Underwriting

The lender will assess the risk associated with your loan during the underwriting process. This involves checking the information you provided and ensuring the loan meets all cash-out refinance requirements.

7. Close the Refinance Loan

After successfully passing through underwriting, the final step is to close on the refinance loan. This involves signing all necessary paperwork and paying any closing costs. Once closed, the new mortgage will replace your existing loan, and you will receive the cash difference based on the equity withdrawn.

Following these steps can help you efficiently navigate the process of securing a cash-out refinance. Allowing you to capitalize on the equity built in your rental property.

Investment Strategies Using Cash-Out Refi on Rental Property

Utilizing a cash-out refinance on rental properties can be a powerful investment strategy. Here’s some ways how you can use the funds effectively:

Funding Renovations and Improvements

When you secure funds, you can use the cash out refinance loan to invest in your properties through renovations. Upgrading kitchens, adding bathrooms, or modernizing living spaces can significantly increase rental demand and cash flow.

These improvements not only attract tenants but can also substantially boost your property’s value and income overtime.

Diversifying Your Investment Portfolio

Use some of the cash from your refinance to diversify into stocks, bonds, or even startups. Diversification provides a safety net against market volatility and can stabilize your financial portfolio during economic downturns, ensuring long-term growth.

Expanding Your Property Portfolio

Invest the funds from your refinance into purchasing additional properties. Whether you choose to buy more rental units or enter the house-flipping market to increase rental income.

Use your refinanced cash to expand your real estate portfolio. This can multiply your income sources and building a strong investment empire.

Leveraging New Opportunities

Cash-out refinancing can build equity in your existing properties, allowing you to seize new investment opportunities quickly. This strategy is ideal for scaling your operations, entering new markets, or enhancing your current assets to maximize returns.

This proactive approach can help you grow your investment footprint and secure your financial future.

Home Equity Line of Credit (HELOC) vs Cash Out Refinance

Home Equity Line of Credit (HELOC) vs Cash-out Refinance

FAQs in Relation to Cash Out Refinance Rental Property

Can I use cash-out refinance to buy new home?

Yes, you can use the funds from a cash-out refinance to purchase new home.

Is cash-out refinance taxable?

No, because they are considered loan proceeds, the funds from a cash-out refinance are not taxable. However, you should consult to a tax advisor for specific advice, to ensure compliance with local tax laws.

How to use cash-out refinance so the interest is tax-deductible?

To ensure the interest is tax-deductible, use the refinance funds for home improvements or purchasing property.


So now you’ve explored the ins and outs of a cash out refinance for rental property. Here’s what to remember: Home equity can become your financial ace, offering capital for more investments or upgrades.

Dive into the numbers—such as credit scores, LTV ratios, and sufficient reserves since it crucial for approval. Get ready for some paperwork; choosing lenders, navigating terms, and dealing with appraisals.

While getting cash from refinancing offers tax benefits and better cash flow, be aware of potential risks like increased debt or the threat of foreclosure.

Remember, use refinancing strategically to fuel growth but stay vigilant about long-term impacts on your portfolio.

And If you’re ready to refinance your rental property, eFunder is your go-to partner in this journey. We provide expert guidance and secure the funds you need efficiently.

Schedule a FREE consultation with eFunder now and take the first step towards maximizing your property’s potential.

Affiliate Disclosure: Please be aware that some of the links above are affiliate links. At no additional cost to you, I will earn a commission if you decide to sign up through these links. Your support in using these links enables me to continue providing valuable content and helps grow our community.

Picture of Terence Young
Terence Young

Founder of eFunder

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