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BiggerPockets - Cash-Out-Refinance | What It Is & How To Use It!

Thumbnail of the video “BiggerPockets - Cash-Out-Refinance | What It Is & How To Use It!”
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Author: BiggerPockets
Categories: Real Estate
Tags: real-estate
Views: 2 · Last viewed: 2026-10-15 07:49 UTC

Short Summary

Main recommendation: Use a cash-out refinance on a property that has appreciated, pulling out available equity and reinvesting it in a second property, such as a duplex bought with no cash down, to blend returns across both properties. The presenter's illustrative example pulls 400,000 dollars from a building now worth 1.5 million dollars and shows how the combined cap rate rises from 7.67 percent to 9.71 percent. He stresses doing this only when the owner stays prudent and can comfortably make payments.

Key Points

  • A cash-out refinance accesses equity by taking a new mortgage above the current loan balance, using an 80 percent loan-to-value (LTV) ceiling, so the bank requires at least 20 percent equity to remain after the refinance; LTV limits vary by bank.
  • In the example, the property rose from 1 million to 1.5 million dollars while the 800,000 dollar mortgage stayed the same, so 80 percent of 1.5 million (1.2 million) minus the 800,000 balance leaves 400,000 dollars available.
  • The cap rate on the original property fell from 10 percent to 7.67 percent because net operating income (NOI) rose 15 percent to 150,000 dollars against the higher 1.5 million dollar value, which is the cap rate a new buyer would realize today.
  • Combining the original property with the duplex blends returns across both assets: combined NOI is about 145,000 dollars against about 75,000 dollars in annual mortgage payments, giving a blended cap rate of 9.71 percent.

Details Worth Noting

Concrete instructions:

  • Estimate the property's current value and multiply by 80 percent; subtract the existing mortgage balance to find the cash available to pull out.

  • Confirm that after the refinance, total debt against the new value still leaves at least 20 percent equity to meet the bank's requirement.

  • Calculate the new property's NOI and divide by its price to get the cap rate, then compare it with the original property's cap rate to judge the deal.

  • Keep the new mortgage payments simple to model: the presenter held the rate at 4.5 percent amortized over 25 years and kept the payment unchanged to isolate the effect of the refinance.

  • Before proceeding, check that the combined cash flow after all mortgage payments is comfortable, not a stretch to make the deal work.

  • The example uses round numbers and a 10 percent starting cap rate, which the presenter says is higher than cap rates in his own markets; viewers in other markets should adjust the figures.

  • The duplex produced only about 5,432 dollars in cash flow before taxes, so the case for it rests on the combined portfolio rather than the duplex alone.

  • The original 2015 purchase used a 20 percent down payment (200,000 dollars) on a 1 million dollar property with an 800,000 dollar mortgage.

Bottom Line

A cash-out refinance can convert appreciation into a second investment and improve the portfolio's overall cap rate, but the numbers only work if the new payments are affordable and the owner is not overextended.