Cash-Out Refinance

A cash-out refinance swaps the current mortgage for a bigger loan, and the owner walks away with the extra proceeds. For income property, both the new value and the allowable debt service come from NOI. Higher NOI means more cash out.

Suppose a renovation lifts the default house's NOI from $28,892 to $34,000. At a 6.5% cap rate, value rises from about $444,500 to about $523,100. At 75% loan-to-value, the maximum loan grows by roughly $59,000, provided the NOI also passes the lender's coverage test.

The cash is not income and does not appear in NOI. It is borrowed money, and the larger loan raises debt service, which lowers future cash flow. Many investors use the cash for their next purchase, which only works if the refinanced property still covers its larger payment.