A cash-out refinance turns part of the equity in a rental you already own into cash you can spend, by replacing the old loan with a bigger one and pocketing the difference. It is the most common way small landlords fund the next down payment without selling anything. The catch is that the new loan is bigger, the payment is usually higher, and the money is not free: every dollar you pull out has to earn more than the new loan costs, or the refinance quietly makes you poorer.
Almost every page that ranks for this topic is published by someone who wants to write you the loan. So the numbers get soft and the downsides get small. This walks the actual mechanics: the loan-to-value caps, the seasoning clock, the closing costs, and the before-and-after payment math, so you can decide whether the cash is worth the new debt before a loan officer decides for you.
The LTV caps and the seasoning clock
Conventional cash-out refinances on investment property run through Fannie Mae's eligibility matrix, specifically guideline B2-1.3-03. As of 2026 it caps a cash-out refinance at 75% loan-to-value on a one-unit investment property and 70% LTV on a 2-4 unit. These caps move from time to time, so confirm the current number with your lender before you build a plan around it. The same guideline sets the seasoning period at six months: the gap between the date you bought the property and the note date of the new loan must be at least six months, with narrow delayed-financing exceptions for all-cash purchases.
The cap is on the new loan, not on your gain. Say you bought a single family rental for $250,000, it now appraises at $360,000, and you owe $190,000. At a 75% cap the new loan tops out at $270,000. Pay off the $190,000 balance and you have $80,000 of gross proceeds before costs, even though you have well over $80,000 of equity on paper. The appraisal and the cap, not your mental math, set the ceiling. If you are not sure how much equity you actually have, the difference between today's value and what you owe is the whole of it; the equity glossary entry walks the definition.
What it costs, line by line
A refinance is a new closing, so it carries closing costs, usually 2% to 6% of the loan amount. On a $270,000 loan that is roughly $5,400 to $16,200. The line items echo a purchase: lender origination, an appraisal (often $500 to $800 on a rental, more on a small multi), title work and lender's title insurance, recording fees, and prepaid escrow for taxes and insurance. There is no transfer tax in most places because you are not changing owners, but check your county.
Investment-property loans also price higher than the loan on the home you live in, through loan-level price adjustments that show up as a higher rate or more points. That premium is the reason investment property mortgage rates run higher than your own mortgage. Roll the costs into the loan and your proceeds shrink; pay them out of pocket and your cash on hand shrinks. Either way they are real, so subtract them before you call the equity “free.”
The before-and-after the lender will not show you
A cash-out refinance is two trades at once: you take cash today, and you take a bigger payment for years. Run both. Say the $360,000 rental carries a $190,000 balance at 5.0% with $1,020 of monthly principal and interest. You refinance into $270,000 at 7.25% for 30 years. The new principal and interest is about $1,842 a month. You walked away with roughly $75,000 after costs, and your payment went up about $822 a month, which is $9,864 a year.
So the $75,000 has to do real work. At $9,864 a year of added carrying cost, the pulled equity has to earn about 13% only to break even on the payment increase, before you count what it earns net of the deal you put it into. That hurdle is why a cash-out into a low rate can be a fine move and a cash-out into a much higher rate is often a trap. The test is not “can I get the money,” it is “does the next dollar beat the cost of the dollar I borrowed.” If you are deploying the cash into another rental, run it through a cash-on-cash calculator first and compare that return to the 13% hurdle, not to zero.
One more number lenders care about even when you do not: the debt service coverage ratio. A bigger payment lowers the DSCR on the property, and if it drops under what the lender requires, usually around 1.20 to 1.25, the cash-out you wanted may not be the cash-out you get approved for.
Cash-out refinance vs HELOC
The cleanest alternative is a HELOC against the rental's equity, and the two solve different problems. A cash-out refinance replaces the entire first mortgage with one new loan, usually at a fixed rate, and resets the clock. A HELOC on an investment property sits behind your existing mortgage as a second lien, runs at a variable rate, and lets you draw and repay like a credit line, leaving your first loan untouched.
- Reach for the cash-out when current rates are at or below your existing rate, when you want the certainty of a fixed payment, and when you need most of the equity at once for a planned purchase.
- Reach for the HELOC when your existing first mortgage carries a low rate you do not want to lose, when you only need part of the equity, or when the need is short term, such as covering a rehab you plan to repay quickly.
- Watch the rate type either way. Investment-property HELOCs are harder to find than ones on your home, carry higher rates, and the variable rate can climb. The cash-out trades that uncertainty for a permanently larger fixed obligation.
The BRRRR version of the same move
BRRRR stands for buy, rehab, rent, refinance, repeat, and the refinance step is exactly the cash-out above, run on a property you forced up in value. The idea: buy a tired property cheap, fix it so the appraisal jumps, rent it, then cash-out refinance against the new higher value to recover most of what you put in, and roll that cash into the next one. When the spread between your all-in cost and the after-repair value is wide enough, you can pull out close to your full basis and keep a property with little or none of your own cash left in.
The seasoning rule is what trips people up. Because conventional guidelines measure cash-out LTV against the appraised value only after six months of ownership, the refinance does not happen the week the paint dries. Plan the carry for those months, and underwrite the deal on a conservative after-repair value, not the optimistic one, because if the appraisal comes in low the cash you were counting on to repeat is not there.
The tax and recordkeeping consequences
The cash you take out is not taxable. A loan is borrowed money, not income, so pulling $75,000 out of a rental creates no tax event by itself. What changes is your interest deduction. Under the tracing rules in IRS Publication 527, interest on the new loan is deductible against the rental only to the extent the proceeds are used for that rental or another business or investment purpose. Buy another rental with the cash and the interest on that slice traces to the new property; spend it on a personal purchase and that interest is not a rental deduction at all.
That makes a clean record of where the money went non-negotiable. From the moment the refinance funds, you want the new loan's payment split into interest, principal, and escrow, because only the interest is deductible and principal is not, a split many landlords still get wrong by deducting the whole payment. The mechanics of keeping that split straight are in tracking mortgage interest, principal, and escrow correctly, and the broader picture of when to refinance at all sits inside the guide to financing a rental property.
This is the seam where I built rents.ai for myself: its equity tracking flags when a property has crossed into refi-able territory, and after you close, the new loan's amortization and interest/principal split replace the old one so your Schedule E stays right. It will not shop the loan for you or pull a live rate, so the lender call is still yours to make. The software keeps the numbers honest once the deal is done.
The figures here are illustrative and the LTV and seasoning rules cited are Fannie Mae conventional guidelines current as of 2026 that can change; confirm them with your lender. Nothing here is tax advice. Use these estimates to organize your year and bring real numbers to your CPA.