If you own a rental property that has built up equity, a cash-out refinance could be one way to put it back to work for you. But before you go that route, there are a few key points to understand. First,  the underwriting is a different animal from what you may have experienced in the past, including tighter LTV caps, higher rates, and a reserve requirement that can catch even experienced investors off guard.

This guide covers what you need to know about cash-out refinances for investment properties, including Fannie Mae loan-to-value (LTV) limits, how much the rate premium will cost you over time and the tax implications. Once you’re up to speed, you’ll be able to decide whether a conventional cash-out refi is the best move compared to alternatives such as a debt service coverage ratio (DSCR) loan.

What is a cash-out refinance on an investment property?

A cash-out refinance on an investment property replaces your current mortgage with a larger loan, giving you the difference in cash. It’s a way to convert equity into liquid capital without selling the property. The mechanics mirror a primary-residence cash-out refi, but the limits and requirements are generally stricter.

Investors can use this tool to support a BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat), in which equity from one property funds the acquisition of the next. Other common uses include funding renovations that increase rent or appraised value, or consolidating higher-rate debt elsewhere in the portfolio.

Using investment property equity to fund lifestyle expenses or pay off personal debt puts the property at risk if you can’t repay the loan.

Investment property cash-out refinance requirements

Credit score

Credit-score requirements vary by lender, underwriting method, number of units, LTV, and other risk factors. In practice, investment-property cash-out refinances typically require stronger credit than owner-occupied loans, and lender overlays are common on cash-out transactions. If your score falls in the lower range lenders typically accept, expect fewer options and a meaningfully higher rate.

LTV limits

Fannie Mae caps the loan-to-value ratio on an investment property cash-out refinance at 75% for a single-unit property and 70% for a 2-4 unit property, both lower than the caps on primary-residence cash-out refis.

Cash reserves

Reserve requirements vary by the loan’s risk profile, occupancy, and the number of financed properties. Cash-out refinances on investment properties typically require at least six months of reserves, with borrowers holding multiple financed properties needing additional documented reserves across their portfolio.

Worth noting: Cash back received at closing is explicitly excluded from the account balance used to document those reserves, so the funds must exist independently before you close.

Debt-to-income ratio and rental income

For Desktop Underwriter (DU)-underwritten loans, the general maximum DTI is 50%, though cash-out approvals can be more restrictive, and DU requires six months of reserves once DTI exceeds 45%.

Your rental income counts toward qualifying. When lenders use lease agreements or Form 1007/1025 market rent, they generally count 75% of gross monthly rent to account for vacancy and expenses. When using tax returns, they calculate qualifying income from reported rental income and expenses.

Seasoning and the delayed financing exception

Fannie Mae generally requires at least one borrower to have owned the property for six months before you can refinance and take cash out. If you’re paying off an existing first mortgage, that loan usually must also be at least 12 months old.

However, Fannie Mae’s delayed financing rule allows investors who purchased a property with cash to do a cash-out refinance within the first six months of ownership, without the standard seasoning wait, if certain conditions are met. These include that the all-cash purchase is properly documented and the new loan amount does not exceed the borrower’s documented initial investment plus eligible financing costs on the new loan. This exception may allow you to take an accelerated BRRRR approach and offer a faster timeline.

FHA and VA loans are not available for cash-out refinances on investment properties. FHA generally  requires owner-occupancy for the prior 12 months, and VA cash-out refinances require current occupancy.

Investment property cash-out refinance rates

Investment property cash-out refinance rates are more costly than primary residence refis, mainly because there are two cost layers that can raise your base rate or upfront costs: Fannie Mae’s investment-property loan-level price adjustment (LLPA) and an additional cash-out transaction LLPA.

Keep in mind that if these adjustments result in a higher interest rate, they can significantly raise your borrowing costs over time. It’s always smart to run the full break-even math before you lock.

Does the rate premium kill the deal? Run the numbers first

Figuring out if the cash out is still worth doing even with its rate premium requires some calculating.

Look at how much cash out you could potentially receive based on the amount of equity you have and a 75% LTV for a single-unit property.

Next, factor in what the closing costs might be, and what a higher rate and larger loan balance would cost.

The last step is figuring out if the costs are worth it if you use the cash as a down payment on a new rental property.

Compare that rental’s expected return after expenses with the increase in your existing property’s mortgage payment, keeping in mind that the second property may also build equity over time.

That math works in your favor when the deployed capital earns a return that exceeds the added costs. The cash in your account after closing is borrowed money secured by your rental, not profit.

How to cash-out refinance an investment property

A cash-out refinance can typically take 30 to 60 days to close, depending on a lender’s specific timeline. Here’s how to keep the process moving along on your end.

• Estimate your maximum loan amount using Fannie Mae’s LTV caps (75% for a 1-unit property, 70% for 2-4 units) against your property’s current estimated value. Subtract your existing mortgage balance and closing costs to estimate the cash you could receive.
• Pull your three credit reports and review for errors before a lender runs a hard inquiry.
• Gather your documentation: federal tax returns, current lease agreements, bank statements showing reserves, the existing mortgage statement, and proof of homeowners insurance. The lender may have other requests.
• Shop at least three lenders to compare rates and fees.
• Lock your rate once you are satisfied.
• Review the closing disclosure line by line.

Conventional loan vs. DSCR loan: Two paths to the same cash

A conventional cash-out refinance qualifies you based on your personal income, credit history, and DTI. That works well if you are salaried or self-employed with clean tax returns and own no more than 10 financed properties. (Fannie Mae permits up to 10 simultaneously financed properties for a single borrower, and the count includes your primary residence if it is financed.)

A DSCR loan generally qualifies the borrower based primarily on whether the property’s expected rental income covers the proposed housing payment. A DSCR of 1.0 means rental income equals debt service, and many DSCR lenders want to see a ratio above 1.0. Because these are lender-specific, non-agency products, qualification standards vary widely.

DSCR can make sense if you exceed Fannie Mae’s 10-property limit, own the property in an LLC, or have a hard time qualifying based on your personal income.

The tradeoff is that DSCR loans can carry higher rates than comparable conventional loans.

Tax implications of a cash-out refi on a rental property

The cash you receive from a cash-out refinance is not taxable income. It is borrowed money. You do not report it on your return in the year you receive it, and you do not owe capital gains or ordinary income tax on it.

Mortgage interest on rental-property debt is generally deducted against rental income on Schedule E, subject to applicable tax rules and limitations. Interest on the cash-out portion generally isn’t deductible as a rental expense if you use that money for personal expenses.

Passive activity loss rules put a ceiling on how much benefit you actually see from that deduction. If your rental property generates a net loss after interest, depreciation, and other expenses, the IRS limits how much of that loss you can use to offset other income. A special allowance of up to $25,000 for owners who actively participate generally phases out as your modified adjusted gross income rises above $100,000 and disappears entirely at $150,000. Different rules apply if you qualify as a real estate professional and materially participate in the rental activity.

Depreciation recapture does not trigger when you do the refi, but it may when you eventually sell. When you sell, the IRS may tax some of your profit at up to 25% because of the depreciation deductions you took. Model the full tax picture of an eventual sale when deciding how long to hold.

Alternatives to a cash-out refinance on an investment property

A HELOC on an investment property is possible, but it tends to be harder to find than on a primary residence. Many major lenders skip non-owner-occupied properties altogether, and those that do offer them tend to be more conservative on loan-to-value and pricing.

A home equity loan on a rental delivers a lump sum at a fixed rate but sits in a second-lien position, which can mean higher rates than a cash-out refi on the first mortgage.

A hard money loan is a private, asset-based loan built for speed. Closings in a relatively short amount of time are common, but the cost can be steep, with higher rates and origination fees. These loans are often used for time-sensitive situations where you plan to quickly refinance into permanent financing.

Pros and cons of a cash-out refinance on an investment property

The takeaway

A cash-out refinance on an investment property can be a legitimate wealth-building tool. But it works best when you have a clear, high-return use for the proceeds and realistic expectations about the rate premium, LTV limits, and reserve requirements you will face.

Run the break-even math before you apply by estimating what the cash will earn when deployed against the added borrowing costs, including closing costs. If the return on deployed capital beats those costs by a meaningful margin, the refi can be worthwhile.

If you need long-term, fixed-rate access to a large equity position and have the credit, reserves and conventional borrowing capacity to qualify, a cash-out refinance can work for you. Otherwise, you can consider a DSCR loan, HELOC, or hard-money bridge as alternatives.

Frequently asked questions

What is the 7% rule with investment property?

The 7% rule with investment properties is a rule of thumb that recommends that the annual gross rent generated by a rental property should equal at least 7% of its purchase price. It doesn’t account for expenses or guarantee a profitable investment.

What is the best way to take equity out of a rental property?

There are a few options for tapping into the equity of a rental property, including a cash-out refinance, a cash-out refinance through a DSCR loan, or a home equity line of credit. Deciding which one is best for you depends on your specific financial situation and credit score, how much equity you have, and other factors.

Are investment property cash-out refinance rates more costly than primary residence refinance rates?

In general, you can expect rate offers for an investment property cash-out refinance to be higher than for a primary residence refinance. Lender risk is perceived to be higher for properties that are not owner-occupied, so lenders factor that in when making rate offers.

What is a loan-level pricing adjustment (LLPA)?

An LLPA may be used on Fannie Mae- and Freddie Mac-backed mortgages that are more financially risky, such as loans or refinances for investment properties. LLPAs increase the borrowing cost by charging additional fees, a higher interest rate, or both.