Using a cash out refinance for investment property purchases sounds like a wealth-building hack—pull equity from your primary residence, buy a rental, let tenants pay down both mortgages. The YouTube gurus make it look like free money. But the real math tells a more complicated story, one where the spread between your new mortgage rate and rental yield determines whether you’re building wealth or just adding risk.
The Allure of Leveraging Your Home Equity
The pitch is seductive: your home has appreciated $150,000, sitting there doing nothing. Meanwhile, rental properties in nearby markets cash flow $300-500 per month. Why not put that dead equity to work?
Here’s the basic logic. You refinance your $300,000 mortgage into a $400,000 loan, pulling out $100,000 in cash. You use that as a down payment on a $400,000 rental property. Now you have two assets appreciating instead of one, and rental income covering (or partially covering) the new debt service.
The problem isn’t the concept—it’s that most people run the numbers wrong.
The Spread That Actually Matters
The entire strategy hinges on one calculation most investors skip: the spread between your cost of capital and your return on deployed capital.
Let’s say your cash-out refinance comes at 7.5% interest. You’re borrowing $100,000 at that rate, which costs you roughly $625 per month in interest alone (principal payments are separate—you’re building equity, but it’s not cash flow).
For this to make mathematical sense, your rental investment needs to return more than 7.5% on that $100,000. Not gross rent—actual cash-on-cash return after all expenses.
A $400,000 rental property collecting $2,800/month in rent sounds great. That’s $33,600 annually, or 8.4% gross yield on the total property value. But you didn’t buy the property in cash. You put $100,000 down and borrowed the rest.
Your actual expenses look like this:
- Mortgage payment on rental (assuming 7.5% on $300,000): ~$2,100/month
- Property taxes: ~$400/month
- Insurance: ~$150/month
- Vacancy allowance (8%): ~$225/month
- Maintenance reserve (10%): ~$280/month
- Property management (if applicable): ~$280/month
That’s $3,435 in monthly obligations against $2,800 in rent. You’re negative $635 per month before even accounting for the increased payment on your primary residence from the cash-out.
When the Math Actually Works
The strategy isn’t inherently flawed—it just requires specific conditions that don’t exist in most markets right now.
Condition 1: A meaningful rate spread. If you can refinance at 5% and rental properties yield 8% cash-on-cash, you have a 300 basis point spread working in your favor. At current rates hovering around 7%, you need rentals yielding 10%+ to have meaningful positive leverage. Those exist, but not where most people are looking.
Condition 2: Below-market acquisition. Paying retail for a rental property while borrowing at retail rates is a recipe for break-even at best. The investors who make this work are buying distressed properties, foreclosures, or off-market deals at 15-20% below market value.
Condition 3: Forced appreciation potential. If you can buy a property that needs $30,000 in work but will increase in value by $60,000 after renovation, you’re creating equity that changes the return calculation. But this requires skills, time, and risk tolerance that most people underestimate.
Condition 4: Markets with rent growth potential. Some investors bet on future cash flow rather than present returns. Rent growth varies significantly by location and economic conditions—historically averaging around 3-4% nationally, though individual markets can see higher or lower growth depending on local supply, demand, and economic factors. A property that barely breaks even today could cash flow in 3-5 years if rents rise, but this is a bet on future conditions, not a guarantee.
The Hidden Costs Nobody Mentions
Beyond the obvious math, cash-out refinancing carries costs that erode returns:
Closing costs on the refi. Expect 2-3% of the new loan amount, according to Freddie Mac estimates. On a $400,000 refinance, that’s $8,000-12,000 gone immediately. This reduces your actual cash-out and increases your effective borrowing cost.
Higher rate on cash-out vs. rate-term. Lenders charge a premium for cash-out refinances—typically 0.125% to 0.5% higher than a rate-and-term refi, based on loan-level price adjustments set by Fannie Mae. Over 30 years, that premium costs tens of thousands.
PMI reappearance. If your cash-out drops you below 20% equity in your primary residence, you’re back to paying private mortgage insurance. On a $400,000 loan, PMI typically runs 0.5-1% of the loan amount annually—money that goes nowhere.
Opportunity cost of equity. That $100,000 in home equity was a buffer against market downturns, job loss, or emergencies. Converting it to an illiquid rental property investment means you can’t access it quickly if needed.
The Risk Stack Nobody Talks About
Here’s what makes cash-out refinancing for rentals particularly dangerous: you’re stacking correlated risks.
Your primary residence and your rental property are both exposed to real estate market risk. If the housing market corrects 20%, both properties lose value simultaneously. You could end up underwater on your primary residence (where you just reduced equity) while also holding a rental that’s worth less than you paid.
Meanwhile, your ability to pay both mortgages depends on your job—and job losses often correlate with housing downturns. The 2008 financial crisis showed exactly how this risk stack implodes: job losses, falling home values, and declining rents hit simultaneously, leaving leveraged investors with no options.
A Decision Framework for Cash-Out Rental Investing
Before pulling equity from your home to buy rentals, run through these checkpoints:
Financial stability first. Do you have 6+ months of expenses saved outside of home equity? Can you cover both mortgage payments for 12 months if the rental sits vacant and your income drops? If not, you’re not ready.
Run the real numbers. Use actual market rents (not Zillow estimates), actual insurance quotes, actual property tax bills. Assume 10% vacancy and 10% maintenance. If the deal doesn’t work with conservative numbers, it won’t work in reality.
Calculate your break-even rate. At what interest rate does this deal stop making sense? If you’re refinancing at 7.25% and the deal breaks even at 7.5%, you have almost no margin for error.
Consider alternatives. Could you save the down payment over 18-24 months without touching home equity? The rental will still be there, and you won’t be betting your primary residence on the investment.
Stress test the scenario. What happens if rates rise another 1% when your rental mortgage adjusts? What if rents drop 10% in a recession? What if you need to sell the rental quickly in a down market? If any of these scenarios would cause serious financial harm, the risk isn’t worth the potential return.
The Bottom Line on Cash-Out Refinancing for Rentals
Cash-out refinancing to buy rental properties can work—but it works far less often than real estate influencers suggest. The strategy requires a specific combination of low borrowing costs, high rental yields, below-market acquisitions, and strong personal financial reserves.
For most people in most markets right now, the math doesn’t pencil out. High mortgage rates have compressed the spread between borrowing costs and rental returns to the point where even optimistic projections show break-even results. And break-even isn’t worth the risk of leveraging your primary residence.
If you’re determined to build a rental portfolio, consider whether there’s a path that doesn’t require betting your home. The slower approach—saving for down payments, buying one property at a time with conventional financing—might feel less exciting, but it doesn’t put your family’s housing security at risk.
The real math behind cash-out refinancing for rentals isn’t complicated. It’s just less favorable than the people selling courses want you to believe.
Looking at other ways to leverage home equity? You might also consider whether refinancing makes sense in the current rate environment or explore the hidden costs of buying before you’re financially ready.