What it is
A cash-out refinance retires the existing mortgage with a bigger one and hands you the difference. The property does not change and neither does your ownership; only the capital structure moves. For investors this is the mechanism that turns illiquid equity into deployable cash without triggering a sale, and because the proceeds are loan funds rather than gain, the transaction itself is generally not a taxable event — though treatment varies by state and situation, so consult a tax professional before you plan around it.
How it is calculated
Multiply appraised value by the lender’s maximum cash-out loan-to-value, then subtract what you currently owe. A property appraised at $200,000 with a 75% cash-out limit supports a $150,000 loan; against a $100,000 payoff, that frees roughly $50,000 before costs. Closing costs — origination, appraisal, title, and prepaid escrows — come out of that figure, so plan on netting several thousand dollars less than the gross. Investment properties are held to tighter limits than primary residences, commonly in the 70–75% range rather than 80%.
Gross proceeds = (appraised value × cash-out LTV) − existing payoff. Net proceeds subtract closing costs. On a $200,000 value at 75% LTV with a $100,000 payoff: $150,000 − $100,000 = $50,000 gross.
How investors actually use it
It is the Refinance in BRRRR, converting a renovated property’s new appraised value into the down payment for the next acquisition. It is also how long-term holders recycle appreciation without losing the asset, the depreciation schedule, or a below-market interest rate on other properties. The discipline is to size the loan to what the rent supports rather than to what the lender allows: pulling the maximum raises the payment permanently, and a property that no longer covers its debt service comfortably has traded a durable asset for a one-time check.
The common mistake
Planning the refinance around a value the appraiser has not confirmed and a rate that no longer exists. Appraisals come in under expectation often enough that the plan needs slack, and the loan is priced the day it closes, not the day it was modeled. The other trap is the seasoning requirement: many lenders will not lend against the new appraised value until you have owned the property six to twelve months, so a BRRRR that assumed an immediate refinance has to carry holding costs it never budgeted. Confirm the specific seasoning rule with the lender who will actually fund the refinance before you close on the purchase, because it varies by program and it is not negotiable once the clock has started.
Put it to work
Related terms
- BRRRR — Buy, Rehab, Rent, Refinance, Repeat — a strategy for recycling one pool of capital across multiple rentals.
- LTV (loan-to-value) — The loan amount divided by the property's value or price.
- Seasoning — The minimum time you must own a property — or hold a mortgage — before a lender will let you refinance at its new appraised value or pull cash out.
- HELOC (home equity line of credit) — A revolving credit line secured by the equity in a property you already own, drawn and repaid like a credit card.