If you’re an investor interested in buying rental properties in Houston, you might be wondering if you can use a cash-out refinance from an existing mortgage to buy an investment property. 

A simple green outline of a house with cash behind it.

The answer is yes; a cash-out refinancing can be used to purchase investment properties.

Using Cash Out Refinancing to Buy Houston Investment Properties


Houston property owners with sufficient equity in their real estate asset(s) are qualified to secure a home equity loan line of credit (HELOC) that includes a cash-out refi. There are two main benefits for rental property owners to cash out the equity on their properties:


  1. Homeowners can use funds from cash-out refinancing to increase their investment portfolio by using them as a down payment to purchase more real estate.
  2.  They can leverage this home equity to access funds that would otherwise be unavailable through traditional financing methods.


It’s essential to be mindful of the type of property you are investing in and any associated costs with owning an investment property in Houston.


Before using your home’s equity for cash-out refinancing to buy another investment property, it’s important to consider the risks and benefits of a cash-out refinance. 

What is Home Equity?


Home equity is the difference between the market value of your home and the amount you still owe on your mortgage. You can tap into your equity by cash-out refinancing your existing loan or borrowing against a mortgage-free home.


Essentially, cash-out refinancing replaces your existing mortgage with a loan that has a higher principal balance. 

What Are the Requirements for a Cash-Out Refinance?


To qualify for a cash-out refinance, a borrower must have sufficient equity in their existing property. Lenders typically require at least 20% equity to approve a cash-out refinance.


Borrowers who have less than 20% equity may still be able to qualify for a cash-out refinance loan. However, they will most likely have to pay for private mortgage insurance (PMI).


PMI is an additional cost that can add thousands of dollars over the life of the loan.


Borrowers must also meet the minimum credit score, and debt-to-income ratio (typically under 50%) requirements for a cash-out refinance. 


What Are the Benefits of Buying An Investment Property With A Cash-Out Refinance?


A cash-out refi can provide many benefits to rental property investors, including:


  1. Increased buying power – Cash-out refinances can increase your buying power by providing access to additional funds without using your savings.


  1. Lower interest rates – Lenders may offer lower interest rates than an unsecured loan because a property secures the loan.


  1. Tax benefits If you use a cash-out refi to make improvements to an existing rental property, you can deduct those costs from your federal taxes. 


What Are the Risks of Using Cash-Out Refinancing to Buy Investment Properties?


In addition to potential benefits, there are risks associated with cash-out refinance loans. These include:


  1. Increased debt – A cash-out refi will increase your debt and could put your home at risk if you fail to make payments.


  1. Fees – There may be appraisal fees and closing costs associated with taking out a cash-out refinance loan.


  1. Market fluctuations – Investing in real estate always carries the risk of market fluctuations, so it’s essential to be aware of potential risks before making any investments.


How to Qualify for A Cash-Out Refi

A credit report shows an excellent credit score of 760.


Lenders will consider the loan-to-value ratio when using a cash-out refinance for an investment property. The loan-to-value (LTV) ratio measures the loan amount relative to the property’s appraised value.


Generally, lenders will not approve a loan for more than 80% of the appraised value of the home. So, if a property is worth $500,000, you can get a cash-out refi loan for up to $400,000.


Most lenders require you to have at least 25% equity in your home before they approve a cash-out refinance. So, in the example above, you’d need at least $125,000 worth of equity to qualify for a refinance loan.

Cash-Out Refi Loan and Terms


Most lenders seek an excellent credit score and solid income and employment verification. They may also require an appraisal and title search as part of the loan process.


The interest rates for cash-out refinancing loans can be from 4% to 6%, depending on your credit score and the loan terms. Also, closing costs can be from 2% to 5% of the loan amount.


Before signing any agreements for a home equity line of credit, take the time to inquire about interest rates and payment plans. Make sure you know fixed or extended fees that could apply over a long period. 


Additionally, consider all costs associated with the cash-out refi, as unexpected fees can cost far more than anticipated. Understanding these key elements means that you’re getting into a good deal for yourself, and you can avoid any nasty surprises down the road.


Under the right conditions, a cash-out refi can be a perfect way to finance an investment property purchase and grow your portfolio.

First-Time Investor in Houston Rental Property


Using a cash-out refi as the down payment on a rental property can be a great opportunity, but before you jump in, be sure to do your research. Get expert help to analyze potential risks and costs associated with this strategy.


For example, understand the housing market conditions of your investing area. Check out:


  • Home prices
  • Rental rates
  • Crime statistics
  • School districts


It’s also important to consider the costs of owning rental property in Houston, such as taxes, insurance, repairs, and maintenance.


When doing your research, talk to someone with a lot of experience with Houston rental property and the different ways to finance an investment property. 


A professional Houston property manager can give you a good understanding of the market and help you find the right investment property to build your portfolio.

A happy rental property owner enjoys working with her property manager in Houston.


Maximize Rental Income with Houston’s Best Property Management Company

Your rental property investment is significant enough to have the right team to ensure its success. That’s why you need a property management company that can provide personalized service and is well-versed in the Houston market.


Residential Leasing & Management is Houston’s highly-rated property management company for strategic rental property marketing, tenant screening, leasing services, property maintenance, tenant management, routine inspections, turnover services, rental property accounting, and more. 


With 20+ years of experience in managing Houston rental properties, we can help you maximize your rental income, minimize vacancy periods, and reduce unnecessary costs.


Our goal is to make owning investment property stress-free and more profitable for you. Contact us to learn more about how we can help you reach your real estate investment goals in Houston.