Cash-Out Refinance for Doctors: When It Builds Wealth and When It Backfires

Selenid and I just closed on a cash out refinance of one of our investment rental properties.

A cash out refinance is something that is often talked about and is a very useful strategy to further build wealth using real estate. However, many current or future investors remain fuzzy on the exact details as it is often hailed by “experts” as all upside and no downside.

However, just like everything in finance and in life, there are trade offs. They can often be worth it. But you need to be fully informed to make sure you are pulling the right levers to build your wealth and reach financial freedom. Because that is the ultimate goal of course.

So let's open the hood and take a look at the what, how and why of our latest cash out refinance.

The basics of a cash out refinance

In broad terms, here is how a cash out refinance of a property works. It can be any property even your primary home although I would not recommend that. So, let's assume from here on out that we are talking about a rental property.

Anyway, here is what it is and how it works:

You buy a rental property at a fixed purchase price and mortgage interest rate.
Over time, due to market or forced appreciation or both, your property increases in value. You get an appraisal to confirm this new, increased market value.
You, along with a lender, refinance your property based on its new, increased value. Most lenders will provide a new mortgage based on this new market value at 70% loan-to-value (LTV). This means that they will create a brand new loan/mortgage for 70% of the new market value of the property. This is the new mortgage that you will have to pay each month.
This new lender loan does a couple of things: it pays off your old mortgage, it pays the closing costs of the refinancing, and anything extra goes to you as cash back at closing. Hence, a “cash out” refinance.

That is a very technical way of looking at it. In essence, what you are doing is creating a new mortgage to pull out any equity that you have built in the property.

But it's very important to understand these technical details because they result in some important changes to your investment

The value of your property has increased. Your old mortgage did not reflect this increase in market value. But the new one will. And even with 30% of this value being left in the property (due to the 70% LTV on the refinanced loan), the overall principal that the mortgage represents is going to be higher. This means a higher monthly payment. And that means lower cash flow.
The interest rate from the original mortgage will not carry over. So if the interest rates are higher at the time of refinance, you get a higher interest rate and higher monthly payments. Again, lower cash flow can result.
You get cash back at closing! And usually pretty significant cash back if you are refinancing a property that has seen a good jump in value (otherwise it's not really worth doing a refinance at all). And this cash back is tax free (since it is your equity anyway that is being restructured).

To make it even simpler, in a cash out refinance, you are making a trade: You trade a higher monthly mortgage payment (and inherent lower cash flow) for a tax free lump sum.

Why do a cash out refinance?

In my mind, there are very specific circumstances when a cash out refinance can make sense. Otherwise, it probably doesn't make sense.

First of all, you should only do this for a rental property. Remember, with a cash out refinance you are essentially trading a larger loan for a lump sum payment. In 99% of cases that makes no sense. How would increasing your debt make you wealthier? Certainly not if it is bad debt like the debt on your home mortgage. The only time it would make sense is if it was done using good debt, debt that pays you to hold it – like with cash flowing real estate. In this case, your renters pay the mortgage with extra left over for you. So increasing your mortgage isn't a complete financial no-no.

Second, a cash out refinance cuts into your property's cash flow. So, in order for it to make sense, the property should be cash flowing really, really well. Such that the cash flow can cover a larger mortgage payment and still leave a good amount left over for you each month. Ideally, your cash on cash return (learn to calculate this value here) after the refinance should still be at least 10%.

Third, some of the cash out should probably be used on paying off liabilities or building assets. Otherwise, higher cash flow can outweigh the benefits.

If your situation meets these criteria (mainly the first 2), then a cash out refinance can be a great idea. And that is just what aligned with our 3rd ever rental property. So, let's take a look inside the numbers.

The numbers of our cash out refinance

You can find a full analysis of our purchase of this investment property here.

However, in broad strokes, we bought this 3 unit property in 2021 for $202,000 with a 30 year fixed mortgage for 75% of the value at a rate of 4.2%.

By 2025, we charged monthly total rents of $4,100 and, after expenses (including our mortgage + escrow totally $1,056.41 monthly), our cash flow averaged $2,700 monthly. Its calculated cash on cash return was roughly 24%.

And, we started to notice that the market value of the property seemed to be increasing as well. Partially due to luck (market appreciation) and partially due to improvements that we had made on it. We paid $700 for an appraisal and it came back valued at $300,000.

This means the property met both of the first two criteria that I listed above. So we explored a cash out refinance.

The details of the refinance

We reached out to our mortgage broker who brought us 2 options:

A conventional 30 year fixed loan with 70% LTV, and
A 30 years fixed DSCR loan with 80% LTV

On first glance, the DSCR loan seems a better option, especially considering it would allow us to close with the property still in our LLC (and now switch it back to our name and then back to the LLC). But that does come with a price…a much higher interest rate.

So, we decided to play it conservative with the conventional loan which would minimize the monthly payment and preserve more of our equity in the property due to the 70% LTV.

So here is what the mortgage would look like now:

Loan amount of $210,000 based on 70% of market value of $300,000
New higher interest rate of 6.49%
Mortgage plus escrow increasing to $1,700.63 monthly
Approximately $13,000 in closing costs
$57,721.21 in cash back at closing

And here is what this meant for our investment:

Monthly decrease in cash flow of $644.22
Lower calculated cash on cash return by 5%

So, after all of that, we traded $645 in monthly cash flow for a tax free lump sum of $57,721.

And what did we do with the money?

We:

Used some to pay off a significant portion of Selenid's new car – a spiffy 2025 Cadillac Escalade,
Stashed some away for an upcoming vacation, and
We invested the rest into our 2026 backdoor Roth IRAs

In his book Rich Dad, Poor Dad, Robert Kiyosaki gives the following example of using an asset to buy a liability: (paraphrasing) “My wife wanted to buy a brand new Mercedes. Instead of doing that, we bought a rental property. Then we used the money from the rental property to buy a brand new Mercedes. And the property kept giving us cash flow even after we bought the car.”

That snippet of the book convinced both of us to go into real estate investing. So, yes like I said above, using the proceeds of a cash out refi to buy assets is ideal. And we did do that with some of the money. But maybe it's ok to use some just for you as well.

Wrapping up

A cash out refinance is a great tool to take out equity in an investment property in the form of a tax free lump sum.

But, for all of its benefits and the experts who use it to achieve “infinite cash return” on a property (all money initially put into the property via down payment and closing costs is taken out via a cash out refinance), it is not a free lunch. The main trade off is a higher mortgage with a higher monthly payment reusing in lesser monthly cash flow.

However, if your property meets these 2 criteria – increased market value and very high cash flow – a cash out refinance may be a good strategy to further you along the path to financial freedom.

New to real estate investing? Or are you an expert looking to optimize? Either way, these resources can help:

What do you think? Have you used a cash out refinance? How did it go? Why did you do it? What did you use the money for? Let us know in the comments below!