The Cash-Out Refinance
The Cash-Out Refinance
The cash-out refinance is where the BRRRR deal becomes real. You refinance the property into a conventional loan at 70-75% of the new appraised value after rehab, not the original purchase price. The difference between the old loan balance and the new loan amount is cash in your pocket.
Key takeaways
- LTV (loan-to-value) on the refi is typically 70-75%, compared to 80-85% on purchase loans.
- The new loan amount is calculated on the new appraised value, not your acquisition cost.
- You must meet seasoning (6-12 months occupancy) before underwriting approves the refi.
- The appraiser's value opinion drives the entire refi—if it is low, your cash-out is reduced.
- Refi costs (appraisal, underwriting, title, origination) typically run 2-3% of the new loan amount.
How cash-out refinance works
You bought a property for $100,000. You invested $50,000 in rehab and carrying costs. The property is now worth $200,000 (the market value after rehab). You owe $150,000 on the hard money loan. You refinance into a conventional 30-year fixed loan at 72% LTV of the new appraised value.
New appraised value: $200,000 Refi loan amount at 72% LTV: $200,000 × 0.72 = $144,000 Less: payoff of hard money loan: $144,000 − $150,000 = −$6,000
In this scenario, you actually owe $6,000 more than the new refi loan covers, so you would have to bring cash to closing or negotiate the hard money payoff. This happens when the appraisal comes in lower than expected or rehab costs exceed projections.
But let us adjust the numbers to a successful deal:
You bought for $100,000. You invested $40,000 in rehab and $8,000 in carrying costs. The property is now appraised at $200,000. You owe $148,000 on hard money.
New appraised value: $200,000 Refi loan amount at 72% LTV: $200,000 × 0.72 = $144,000 Less: payoff of hard money loan: $144,000 − $148,000 = −$4,000
Again, you are short. But if you appraised at $210,000:
New appraised value: $210,000 Refi loan amount at 72% LTV: $210,000 × 0.72 = $151,200 Less: payoff of hard money loan: $151,200 − $148,000 = $3,200 (net cash out) Less: refi costs (estimate 2.5%): $151,200 × 0.025 = $3,780 Net to you: $3,200 − $3,780 = −$580 (you are paying to close)
This illustrates why the appraisal is so critical. A $10,000 difference in appraised value results in a $7,200 difference in the refi loan amount (at 72% LTV). If the appraisal is low, your cash extraction is small or zero.
The appraisal: the lynchpin of the refi
The appraiser is a licensed professional (usually MAI certified for investment property) who inspects the property and estimates its market value. The appraisal is based on:
Recent comparable sales. The appraiser finds 3-5 recently sold properties in the same market that are similar in size, condition, and location. If your rehab cost $50,000 and comparable properties in the area sold for $190,000-$210,000 after similar rehabs, the appraisal will likely come in $190,000-$210,000.
Income approach. For rental properties, some appraisers (particularly for commercial or multi-unit properties) also consider the rent income. If the property rents for $1,200/month and the market cap rate for similar properties is 6%, the income approach might estimate value at $1,200 × 12 ÷ 0.06 = $240,000. This approach is less common for single-family BRRRR, but it is another lens.
Cost approach. The appraiser estimates the land value plus the cost to rebuild the structure. If the land is worth $60,000 and the building cost $80,000, the cost approach suggests $140,000. This is typically a floor (you would not price below reproduction cost).
The appraiser reconciles these approaches and issues a final opinion of value. On a single-family home, the appraisal report is typically 5-10 pages with photos, a detailed description of the property, the comps analysis, and the appraiser's signature.
LTV and the refi loan amount
The lender's LTV requirement is the ratio of the loan amount to the appraised value. A 72% LTV loan means the lender will lend up to 72% of the appraised value. You are required to have 28% equity (the downpayment, in effect, on the refi).
Why 72% instead of 80-85%? The answer is risk. On a purchase loan, the bank is lending to someone buying at market price (presumably efficient). On a cash-out refi, you are borrowing heavily against an asset you just substantially altered. The lender wants a margin of safety: if the property value is misjudged or the market softens, the 28% cushion protects the lender.
LTV on cash-out refi varies:
- 70-75% is typical for owner-occupants and smaller properties.
- 65-70% is common for investment properties or larger loans.
- 60% or lower is typical for commercial properties or very high-risk profiles.
You negotiate LTV with the lender upfront. A higher LTV means more cash out, but the interest rate may be slightly higher. A lower LTV means less cash out, but a better rate.
The appraisal contingency and appeal process
Once the appraisal is ordered, you will have it within 5-7 days. If the appraised value is lower than you expected, you have options:
Accept it. If the appraisal is reasonable (within a few percentage points of your estimate), you proceed. A $3,000 shortfall on a $200,000 appraisal is 1.5%—close enough.
Request a reconsideration of value (ROV). If you believe the appraiser made an error (overlooked a recent comp, misjudged condition, or used a bad comparison), submit a written ROV. You can provide additional comps or a detailed explanation of any condition improvements the appraiser may have missed. Many appraisers will adjust by $1,000-$5,000 for a reasonable ROV, but they rarely budge by large amounts.
Order a new appraisal. If the shortfall is significant and you believe the first appraisal is wrong, you can pay for a second appraisal. Lenders will typically average the two appraisals or use the lower. This is expensive (another $400-$600) and rarely reverses a low appraisal.
Walk away. If the appraisal is so far off that the deal no longer pencils, you can decline the refi. You will forfeit the appraisal fee ($400-$600) and remain on the hard money loan. This is uncommon but happens when the market shifts or the rehab quality does not meet expectations.
Refi loan terms and rates
Once the appraisal supports your loan amount, underwriting approves the refi (assuming the property is seasoned, occupancy is verified, and your credit is acceptable). The lender will offer a rate and term.
As of early 2024, conventional 30-year fixed rates on investment property cash-out refis ranged from 6.5-7.5%, depending on the borrower's credit score, the property's LTV, and the market. Owner-occupant rates are typically 0.5-1.0% lower.
Some operators also consider:
15-year term. A 15-year refinance will have a higher monthly payment but build equity faster and cost less in interest. If you plan to hold the property and cash-flow it for years, a 15-year refi might make sense. If you plan to refi again soon, stick with 30 years.
Adjustable-rate mortgages (ARM). Some lenders offer 5/1 or 7/1 ARMs (fixed for 5 or 7 years, then adjustable). These typically carry a 0.25-0.5% lower rate upfront. For short-term BRRRR operators (planning to sell or refi again in 3-5 years), an ARM can save money.
Loan fees. Lenders charge origination fees (0.5-1.5% of the loan amount), underwriting fees ($500-$1,000), and other charges. Shop around; a 0.5% difference in origination fee on a $150,000 loan is $750.
Refi closing: timeline and documents
Once approved, the refi moves to closing. Timeline is typically 30-45 days from application to funding.
Week 1: Application, appraisal ordered. Week 2-3: Appraisal completed, underwriting initial review. Week 3-4: Final conditions (occupancy docs, income verification, property photos) submitted. Week 4-5: Underwriting clear to close. Week 5-6: Title examination and insurance, final walk-through, closing disclosure (CD) issued. Week 6: Closing meeting (can be virtual). You sign documents and provide final funds (if any).
The closing disclosure itemizes all fees, the loan amount, the interest rate, and monthly payment. Review it carefully 3 days before closing. Any surprises should be flagged immediately.
At closing, you sign the note (the promise to pay), the deed of trust or mortgage (the lender's security interest), and a detailed closing statement. The title company collects funds and pays off the old hard money loan. The remaining funds are wired to you.
Managing the new mortgage
After closing, your hard money loan is paid off and you now have a conventional 30-year (or 15-year) mortgage at a much lower rate. The monthly payment is lower and the loan is structured to allow you to hold the property long-term.
Many BRRRR operators now have a property with zero cash invested (or even negative cash invested, if they pulled out more than they put in) and positive monthly cash flow from the tenant's rent. This is the ideal BRRRR end state: you control an appreciating asset, the tenant is paying off the mortgage, and you are generating income.
Lenders often impose conditions on refi loans: you must occupy the property for 12 months (if it was advertised as owner-occupant financing), you cannot refinance again within a certain period, or you cannot take out another cash-out refi within 6-12 months. Read the loan documents and ask your loan officer to clarify any restrictions.
Decision tree
Next
Now that the mechanics of the cash-out refinance are clear, the next step is to walk through a complete BRRRR deal from start to finish—the math that ties purchase, rehab, seasoning, and refinance together.