A cash-out refinance lets you pull equity out of a rental you already own without selling it. You take a new, larger loan on the property, pay off the old one, and keep the difference to put toward your next purchase.
For an owner with a few rentals, it's often the most direct way to fund the next one. It's also easy to do without checking what it does to the property you refinance.
How a cash-out refinance works on a rental
The lender appraises the rental and lends you a percentage of that value, called the loan-to-value ratio (LTV). The new loan pays off your existing mortgage and the refinance closing costs, and whatever is left comes to you as cash.
You keep the property, the tenant, and the rent, and take on a bigger loan, a new rate, and a new payment.
A DSCR cash-out is a business-purpose loan. You'll typically sign a statement that the money is for business or investment use, and lenders bar using it for personal spending such as paying off consumer debt.
DSCR cash-out vs. conventional cash-out
A conventional cash-out on an investment property follows Fannie Mae or Freddie Mac rules. You qualify on your income, with tax returns and a debt-to-income test. Fannie Mae caps investment cash-outs at 75% LTV for a single-unit property and 70% for two to four units, and its pricing adds an adjustment for cash-out loans that depends on LTV and credit score.
A DSCR cash-out qualifies on the property instead. The lender divides the rent by the new full monthly payment (principal, interest, taxes, insurance, and any HOA dues), with no W-2s or tax returns. That matters for owners whose returns show little income because depreciation is doing its job. The trade is that DSCR terms vary far more from lender to lender, and most DSCR loans carry a prepayment penalty, commonly for one to five years, unless you pay a higher rate to drop it. More in DSCR vs. conventional mortgage.
The usual limits, and why they vary
These are typical ranges from published guidelines in the market. They aren't Lineage's lending partner's terms, and your lender's are the ones that count.
| Limit | Conventional (Fannie Mae) | DSCR (examples, lender-dependent) |
|---|---|---|
| Maximum LTV, single-family | 75% | Commonly 70% to 80%, depending on credit score and DSCR |
| Maximum LTV, two to four units | 70% | Often lower than single-family |
| Time on title before cash-out | At least six months | Varies. Some lenders cut the LTV or use your purchase price instead of the appraisal in the first months |
| Age of the loan being paid off | If a first mortgage is paid off, at least 12 months, note date to note date | Set by each lender |
| Minimum DSCR | Not used | Many want 1.0 or higher. Some allow lower at a reduced LTV |
Because the lender tests the new, bigger payment, a good DSCR ratio after the refinance matters.
An illustrative example: funding Seale Rd
Say you own a single-family rental that appraises at $300,000. You owe $150,000, your principal and interest payment is $800 a month, and it rents for $2,100 with $350 a month in taxes and insurance. All are assumptions.
| Step | Amount |
|---|---|
| New loan at 75% LTV | $225,000 |
| Pay off existing loan | -$150,000 |
| Refinance closing costs (assumed) | -$6,000 |
| Cash to you | $69,000 |
If the loan you're paying off has its own prepayment penalty, that comes out of the $69,000 too.
First, check that it qualifies. A $225,000 interest-only loan at an assumed 6.5% costs about $1,219 a month. Add the $350 in taxes and insurance and the new full payment is $1,569. At $2,100 in rent, that's a DSCR of about 1.34, which clears a 1.0 minimum with some room. At 7%, the payment would be about $1,313 and the DSCR about 1.26.
The next property is a real listing: 2107 S Seale Rd in Phenix City, AL, at $230,000. At 20% down that's $46,000, and about $58,000 in total cash to close. The $69,000 covers it with about $11,000 left. Your consultant confirms the lender's minimum, and Lineage also recommends six months of the full payment, $7,782, in reserve. That can sit in an investment account, including a 401(k) or IRA, though some lenders count only part of a retirement balance. Some also let leftover cash-out money count, which here covers it with about $3,200 to spare.
The 6.5% rate and 20% down are the site's example terms, which some first-time buyers get while others pay a higher rate or put more down, depending on credit, experience, and the lender.
Now the part people skip. On the refinanced rental, the new $1,219 payment replaces your old $800. That's $419 a month less cash flow on a property you already owned, since its taxes, insurance, and other expenses don't change. You also stop paying down principal while the loan is interest-only. Cash-out pricing can run higher than purchase pricing, widening the gap.
The plan builder models $295 a month in cash flow per rental after expenses. Against the $419 you give up on the refinanced property, total monthly cash flow drops by about $124 a month, or about $1,500 a year, after the second purchase. What you gain is a second property's appreciation, principal paydown once its loan amortizes, and its tax benefits. Run your own numbers in the reposition calculator, or lay them out over ten years.
The costs and the risks
- Closing costs. Appraisal, title, and lender fees come out of your equity first.
- A higher payment and a lower DSCR. If rent dips or a repair lands, the refinanced property has less room to absorb it. Near 1.0, a vacant month comes out of your pocket.
- More debt on the property. It speeds up equity growth when values rise and magnifies losses when they fall.
When not to do it
Skip it, or wait, if any of these are true:
- The refinanced property would barely cover its own payment. If the new DSCR lands near or below 1.0, you're funding the next purchase by making the current one fragile.
- Your current rate is far below today's. Swapping a cheap loan for an expensive one can cost more each month than the new property earns.
- You'd have no reserves left. Lineage recommends six months of payments on hand for the new loan, and you'll want a cushion for both properties.
- The property you'd refinance is the one you should sell. If big repairs are coming or the market is weak, a sale or a 1031 exchange may use the equity better.
If your equity has grown faster than your rent, equity growth may be hurting your ROI. A cash-out puts that equity back to work only when the property can carry the bigger loan comfortably.
Illustrative example. Actual returns vary based on market conditions, property performance, and financing terms. Loan terms come from the lender, and this is not a quote or a commitment to lend.
Build my plan to see what the next property does to your portfolio, or talk to a consultant about the one you'd refinance.
Frequently asked questions
Many lenders cap investment cash-outs between 70% and 80% of appraised value, minus what you still owe and the closing costs. Fannie Mae's limit is 75% for one unit and 70% for two to four. DSCR lenders set their own by credit score, property type, and DSCR.
Fannie Mae generally requires at least six months on title, with a few exceptions such as inherited property, and if a first mortgage is being paid off, it must be at least 12 months old, note date to note date. DSCR lenders vary, and some allow it sooner at a lower LTV.
It can be when your tax returns make conventional qualifying hard and the rent comfortably covers the new payment. Weigh the cash flow you lose on the refinanced property against what the next one is projected to earn. See the lending page for how DSCR financing works with Lineage.