Cash-Out Refinance on a Rental: Running the Numbers

Pulling equity out is not free money. It is a trade: cash today for cash flow and coverage every month after.

9.9%

The true annual cost of the equity pulled out, paid in surrendered cash flow.

The mechanics

Term	Typical for investment property
Maximum LTV	70% – 75% (single-family); often 70% for 2–4 unit
Seasoning required	6 – 12 months conventional; 3 – 6 months on many DSCR products
Rate premium over a purchase loan	0.25 – 0.75 points
Closing costs	2 – 3% of the new loan amount
Reserves required after closing	2 – 6 months PITI
Appraisal basis	Current market value, not your purchase price

Also note what resets: a new 30-year term restarts amortisation. The five years of principal you paid down are converted into cash and then re-borrowed, and the clock starts again. That is not automatically bad — but it belongs in the analysis.

A worked refinance

The $240,000 example, three years in. The property has appreciated to $290,000, rent and NOI have grown about 3% a year, and the loan has amortised.

Extracting equity at 75% LTV

Current value: $290,000
New loan at 75% LTV: $217,500
Existing loan balance (36 payments in): −$173,837
Refinance closing costs (~2.5%): −$5,438
Cash to you: $38,225

$38,225 in hand.

What it costs, every year, from now on

NOI in year 3 (3% growth): $16,395
Old debt service (6.75% on $180,000): $14,009
Cash flow before the refinance: $2,386
New debt service (7.25% on $217,500): $17,808
Cash flow after the refinance: −$1,413

DSCR falls from 1.17 to 0.92. Annual cash flow drops by $3,799.

Divide the annual cost by the cash received: $3,799 ÷ $38,225 = roughly 9.9% a year. That is the honest price of this capital, and it is the number to compare against whatever you plan to do with it. If the next deal returns 12%, the trade is defensible. If it returns 6%, you have borrowed at 9.9% to earn 6%.

The DSCR consequence is the real risk

Cash flow going negative is uncomfortable. Coverage falling to 0.92 is dangerous — the property can no longer pay its own mortgage from operations, so every vacancy, every repair and every insurance increase now comes out of your pocket with no buffer at all. Many lenders would not write this loan; the fact that one will does not make it safe.

When it is worth doing

Good reasons	What has to be true
The equity is idle and your return on it has collapsed	You have actually computed return on equity — annual return ÷ current equity — and it is well below your alternatives.
You are recycling capital into a better deal	The next deal’s return clearly exceeds the effective cost you just calculated, with margin for being wrong.
You are completing a BRRRR	The refinance was the plan from the start and the post-refi property still covers itself. See the BRRRR guide.
Funding a value-add on this property	The improvement raises NOI enough to restore coverage — the loan pays for something that services the loan.
Building a liquidity buffer at a known price	You have priced the alternative (a HELOC, a portfolio line) and this is genuinely cheaper.

Bad reasons	Why
“It’s tax-free money”	Borrowed funds are generally not taxable income — which is true of every loan and says nothing about whether this one is a good idea.
The property appreciated so the equity is “free”	The equity is real; the cash is borrowed against it at a rate, with a payment attached.
To cover the negative cash flow on another property	Two thin deals do not make one good one. This is how portfolios unwind.
Consumption	Converting a productive asset’s cash flow into a spent lump sum, permanently.

How to size it properly

Do not take the maximum. Work backwards from the coverage you want to keep:

Step	On this example
1. Decide your DSCR floor	1.20
2. Maximum debt service = NOI ÷ floor	$16,395 ÷ 1.20 = $13,663/yr
3. Loan supported at 7.25% over 30 years	≈ $166,900
4. Compare to the current balance	$173,837 — already above it

Which is the honest verdict here: at a 1.20 coverage floor, this property supports less debt than it currently carries. There is no responsible cash-out at all, because the rate on the new loan is higher than the rate on the old one and NOI has not grown enough to compensate. Appreciation created equity; it did not create borrowing capacity.

Alternatives worth pricing first

A HELOC or portfolio line of credit lets you draw only what you need, keeps the low-rate first mortgage in place, and costs nothing when undrawn. On a property with a 6.75% first mortgage in a 7.25% market, keeping that loan intact is often worth more than the convenience of a single refinance. Also check for a prepayment penalty before you model anything.

Run both scenarios side by side — current loan versus refinanced — in the free calculator, and compare DSCR before deciding. The cash is easy to see; the coverage is what you will live with.

Frequently asked questions

How much can I cash out on a rental property refinance?

Most investment-property cash-out refinances are capped at 70 to 75% loan-to-value on a single-family home, often 70% on two- to four-unit properties. The practical limit is usually tighter than the lender's cap, because the new payment has to leave you an acceptable debt service coverage ratio.

Is a cash-out refinance on a rental property taxable?

Borrowed money is generally not taxable income, so a cash-out refinance is typically not a taxable event by itself. How the interest is treated depends on what the funds are used for, and the rules are specific enough that you should confirm the details with your accountant.

How long do I have to wait before a cash-out refinance?

Conventional lenders commonly require six to twelve months of seasoning, meaning ownership time before they will lend against the current appraised value rather than your purchase price. Many DSCR lenders allow three to six months, which is why BRRRR investors often use them.

Does a cash-out refinance hurt cash flow?

Almost always, and usually more than people expect. You are borrowing a larger amount, typically at a higher rate than the loan you are replacing, so both the payment and the coverage ratio move against you. Calculate the annual cash-flow reduction divided by the cash received — that ratio is the real cost of the money.