Cash-Out Refinance vs HELOC for Investment Properties: Complete Comparison [2026]

Cash-Out Refinance vs HELOC vs DSCR Cash-Out for Investment Properties

Choosing the right equity extraction tool for a rental property requires understanding how each product handles LTV, rates, qualification, and capital deployment. The table below compares all three options side by side.

Note: Rates, LTV limits, and requirements are general estimates and vary by lender, property type, and borrower qualifications. DSCR ratios and projections are estimates that vary by lender. Not all borrowers will qualify for all programs.

How Each Investment Property Equity Extraction Method Works

Conventional Cash-Out Refinance on Rental Properties

A cash-out refinance replaces your existing investment property mortgage with a new, larger loan. The difference between the new loan balance and the old payoff amount is delivered as cash at closing. For investment properties, conventional lenders cap this at 70–75% LTV on single-family rentals — significantly below the 80% threshold available for primary residences.

From my experience closing over 1,200 investment property refinances since 2015: The conventional cash-out path works cleanly when you have strong W-2 income and fewer than 10 financed properties. The fixed rate locks in predictable payments, which simplifies cash flow projections across a portfolio. I've seen investors use this structure to extract $150,000–$400,000 from a single appreciated rental, funding two or three new acquisitions from one transaction.

HELOC on Investment Properties: Revolving Equity Access

An investment property HELOC adds a second lien behind your existing first mortgage, creating a revolving credit line secured by rental property equity. Unlike a cash-out refinance, the HELOC preserves your current first mortgage rate and terms. You draw funds as needed during a 5–10 year draw period, paying interest only on the outstanding balance.

Fewer lenders offer HELOCs on investment properties compared to primary residences, and those that do impose stricter requirements. According to the CFPB's HMDA data, investment property second lien originations represent a fraction of overall HELOC volume. However, for investors sitting on a 3–4% first mortgage rate locked during 2020–2021, a HELOC provides equity access without sacrificing that favorable rate.

A pattern I've observed with my investment clients: Investors who need capital intermittently — for example, to fund rehab draws on value-add projects — benefit from the revolving structure of a HELOC. They draw $50,000 for a kitchen renovation, repay it from rental income or sale proceeds over six months, then draw again for the next project. This cycle keeps interest costs lower than maintaining a permanent larger mortgage balance.

DSCR Cash-Out Refinance: The Investor's Third Path

DSCR (Debt Service Coverage Ratio) loans qualify investors based on the property's rental income rather than personal W-2 or tax return documentation. For a cash-out DSCR refinance, the property's gross rent must typically cover 1.0–1.25 times the new PITIA (principal, interest, taxes, insurance, association dues) payment. This makes DSCR cash-out the go-to product for full-time investors, self-employed borrowers, and anyone with more than 10 financed properties who has exhausted conventional options.

From my work structuring DSCR cash-out refinances across California and Washington: DSCR lenders evaluate the deal, not the borrower's personal finances. I've closed DSCR cash-out loans for investors holding 30+ properties in an LLC — borrowers who would never qualify conventionally due to complex partnership returns and depreciation schedules. The tradeoff is pricing: DSCR rates run approximately 1.0–2.0% above conventional investment rates. But for investors scaling rapidly, the ability to qualify on rental income alone removes the bottleneck.

LTV Limits & Qualification Requirements by Product

LTV (loan-to-value) is the critical constraint for investment property equity extraction. Lower LTV limits mean more equity stays locked in the property, reducing the capital available for redeployment. Here is how each product handles LTV across property types:

1. Conventional Cash-Out (1-unit investment): 70–75% LTV maximum. Requires full income documentation, 680+ credit, and reserves covering 6 months of PITIA on all financed properties.
2. Conventional Cash-Out (2-4 unit investment): 65–70% LTV maximum. Higher reserve requirements and stricter DTI limits apply for multi-unit investment properties.
3. Investment HELOC (1-unit): 65–75% CLTV (first mortgage + HELOC balance combined). Requires 700+ credit, verified rental income, and typically 12+ months ownership seasoning.
4. DSCR Cash-Out (1-unit investment): 70–80% LTV depending on DSCR ratio and credit score. A 1.25+ DSCR with 720+ credit unlocks the highest LTV tiers.
5. DSCR Cash-Out (2-4 unit investment): 65–75% LTV. Multi-unit DSCR loans use aggregate rental income from all units, which often produces stronger DSCR ratios.

A lesson from structuring hundreds of these transactions: The LTV ceiling is negotiable in practice. DSCR lenders with strong rental income documentation regularly approve 75–80% LTV when the DSCR exceeds 1.25. I recently closed a DSCR cash-out at 78% LTV on a duplex in Long Beach where both units were leased at market rate and the DSCR came in at 1.35. That extra 3–5% LTV translated to $24,000 more in the investor's pocket.

Rate & Closing Cost Comparison for Investment Property Equity

Cost efficiency determines which equity extraction method maximizes net capital deployed. Investment property rates carry premiums above primary residence pricing across all products, but the magnitude differs significantly.

The HELOC's dramatically lower upfront cost is its strongest advantage. An investor paying $1,500 in HELOC closing costs versus $12,000 for a cash-out refinance preserves over $10,000 in capital — money that can go directly toward the next acquisition's down payment. However, the HELOC's variable rate introduces uncertainty that fixed-rate cash-out products eliminate.

What I tell investors evaluating total cost of capital: Calculate the “all-in cost” over your expected hold period. If you plan to redeploy equity within 12–18 months and repay the line, a HELOC's lower upfront costs and interest-only payments often produce a lower total cost despite the higher rate. For capital you will carry for 5+ years, a fixed-rate cash-out refinance typically wins on total interest paid.

Which Option for Which Investor Profile

The right equity extraction tool depends on your portfolio size, income documentation, capital deployment speed, and tolerance for rate variability. This scenario table maps common investor profiles to the optimal product.

BRRRR Strategy: Cash-Out Refinance vs HELOC as the Exit

The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy depends on a refinance exit to recapture invested capital. The “Refinance” step is where equity extraction choices directly impact cycle velocity and portfolio growth rate.

Why Cash-Out Refinance Is the Standard BRRRR Exit

1. Replaces the acquisition loan: The cash-out refi pays off the purchase/rehab financing (hard money, private money, or HELOC draw) and replaces it with a permanent long-term mortgage.
2. Lump sum capital recovery: Equity created through forced appreciation (rehab) is extracted as cash in a single closing, immediately available for the next BRRRR cycle.
3. Fixed-rate stability: A 30-year fixed rate locks in the carrying cost of the stabilized asset, eliminating rate risk from cash flow projections.
4. Clean lien structure: One first mortgage with no subordinate debt simplifies future refinancing, selling, or 1031 exchange transactions.

When a HELOC Works in the BRRRR Framework

A HELOC is not the standard BRRRR exit, but it serves two strategic roles within the framework:

1. Acquisition capital source: An investor draws from a HELOC on Property A to fund the purchase or rehab of Property B, then repays the HELOC with the cash-out refinance proceeds from Property B.
2. Rate preservation play: If Property A carries a 3.5% first mortgage and has appreciated significantly, a HELOC extracts equity without disturbing that low rate. The investor deploys HELOC capital for the next acquisition while maintaining favorable economics on the existing asset.

A deal structure I've used with clients successfully: Investor has a $500,000 rental with a $250,000 first mortgage at 3.25%. Rather than cash-out refinancing and losing that rate, we placed a $100,000 investment HELOC in second position. The investor used the HELOC draw as the down payment on a new $350,000 rental, then completed BRRRR on the new property and used the DSCR cash-out proceeds to repay the HELOC. Net result: both properties financed, original low rate preserved, HELOC balance back to zero and ready for the next cycle.

DSCR Cash-Out Refinance: The Portfolio Investor's Equity Tool

For investors who have outgrown conventional financing — either by exceeding 10 financed properties or by having tax returns that obscure actual income through depreciation and business deductions — the DSCR cash-out refinance solves a fundamental qualification problem.

How DSCR Qualification Works for Cash-Out

The lender calculates the property's DSCR by dividing gross monthly rent by the proposed PITIA payment (including the higher balance from the cash-out). If the resulting ratio meets the lender's minimum threshold — typically 1.0 to 1.25 — the loan qualifies regardless of the borrower's personal income, employment status, or other property debt.

From my direct lending experience: I've structured DSCR cash-out refinances ranging from $200,000 to $1.8 million. The most common use case is an investor with 12–20 properties who needs to extract equity from stabilized assets to fund the next wave of acquisitions. These borrowers cannot qualify conventionally because their tax returns show near-zero adjusted gross income after depreciation — even though they collect $30,000+ per month in gross rents.

Tax Implications for Investment Property Equity Extraction

Investment property equity transactions have tax consequences that differ from primary residence equity access. The general framework (consult your CPA or tax advisor for guidance specific to your situation):

1. Mortgage interest deductibility: Interest on investment property debt — whether first mortgage, cash-out refinance, or HELOC — is generally deductible as a business expense on Schedule E against rental income. This contrasts with primary residence rules that limit deductibility to acquisition debt.
2. Cash-out proceeds are not taxable income: Extracting equity through a refinance or HELOC does not create a taxable event. The borrowed funds are not income. Tax consequences arise from how you deploy the proceeds and from the ongoing interest deductions.
3. Interest tracing rules: The IRS applies interest tracing rules, meaning the deductibility of interest depends on how the borrowed funds are used. Equity extracted from a rental to purchase another rental generates deductible interest. Equity used for personal expenses may not qualify for the same deduction.
4. Depreciation recapture considerations: Extracting equity does not trigger depreciation recapture. However, eventually selling the property does. Investors using cash-out proceeds for portfolio expansion should factor depreciation recapture into long-term exit planning.

Seasoning Requirements & Impact on DSCR Ratio

Seasoning — the minimum ownership duration before a lender allows cash-out — directly affects how quickly BRRRR investors can recycle capital. Conventional lenders require 6–12 months of seasoning for investment property cash-out refinances. DSCR lenders have compressed this to 3–6 months in many cases, which accelerates the BRRRR cycle.

The cash-out refinance also impacts your DSCR ratio by increasing the monthly payment. A property with a 1.30 DSCR before cash-out may drop to 1.05–1.10 after extracting equity. Lenders require the post-cash-out DSCR to meet their minimum threshold, so the maximum cash-out amount is effectively capped by the point at which the DSCR floor is breached.

A timing strategy I implement regularly: For BRRRR deals, I advise investors to begin the DSCR cash-out application during month 4 of ownership so the loan closes around month 6 when seasoning is met. This overlapping timeline shaves 6–8 weeks off the cycle compared to waiting until seasoning is met to start the application.

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