Refinancing an investment property can be a smart move. You may be able to get a lower interest rate or better loan terms. Refinancing can also let you take cash out of the property. This is called a cash-out refinance.
A cash-out refinance lets you turn some of that equity into cash in your pocket. This can be useful if you need money to make repairs or renovations. Or you may want to use the cash for other investments.
What is DSCR Refinancing?
With a rental property, lenders look at your debt service coverage ratio (DSCR) instead. This compares the property’s net operating income to its mortgage payments.
Net operating income is the rent you collect minus expenses like taxes, insurance, and maintenance. The DSCR shows if the rental income can cover the new mortgage payment.
How Does DSCR Refinancing Work?
With DSCR refinancing, lenders focus on the property’s cash flow. Your personal income and credit score are less important.
As long as the property makes enough money to cover the new loan payments, you may qualify. Even if your personal finances would not get you a normal mortgage.
Lenders want to see a DSCR of at least 1.0 or higher:
- DSCR of 1.0 – The property makes just enough to cover the mortgage.
- DSCR above 1.0 – The property makes more than the mortgage payment. This gives a cushion in case rents drop.
Lenders may approve a DSCR as low as 0.80 with good credentials. But the higher your DSCR, the better.
What is a Good DSCR for Refinancing?
There is no single DSCR that is best for refinancing. It depends on the lender and the property. In general:
- Multifamily properties often need a lower DSCR of around 1.15.
- Commercial properties may need a DSCR of 1.25 or higher.
- A lower DSCR around 0.90 may work for some stable single-family rentals.
A property with higher rents and lower expenses will have a better DSCR. This makes it easier to qualify for refinancing.
Talk to lenders to see what DSCR levels they require. Aim for the highest DSCR you can reasonably achieve.
Can I Take Cash Out with a DSCR Refinance?
Yes, many lenders let you take cash out with a DSCR refinance. But there are limits on how much you can withdraw.
Lenders want to make sure there is still enough income to cover the new, larger mortgage. So they limit the amount you can cash out based on:
- The property’s appraised value
- Your current loan balance
- The DSCR requirements
Here is an example:
You have a property worth £500,000 with a £300,000 mortgage. The lender requires a 1.25 DSCR for a cash-out refinance.
Based on your property’s rents and expenses, you qualify for a new £400,000 loan. This would give you £100,000 cash in hand.
The £400,000 is the most you can borrow and still meet the 1.25 DSCR. Withdrawing more would make the DSCR too low for the lender’s standards.
How Much Cash Can I Take Out with a DSCR Refinance?
There is no single rule on how much cash you can take out. It varies case by case based on factors like:
- The property’s value
- Your current loan amount
- The lender’s DSCR requirements
- Your property’s cash flow
As a very general guideline, you may be able to withdraw 20-30% of your equity in a cash-out DSCR refinance. But run the numbers with lenders to see what works for your specific property.
You also need enough equity to qualify. Most lenders want you to keep at least 20-25% equity after refinancing.
What are the Costs and Fees for a DSCR Refinance?
- Appraisal fee – Often £200-£500 to value the property.
- Loan origination fee – 1-5% of the loan amount.
- Legal fees – £500-£2,000 or more.
- Valuation fee – £150-£300.
- Application fee – £100-£300.
What are the Risks of DSCR Refinancing?
DSCR refinancing has some risks to consider:
- If rents fall, the DSCR could drop too low to cover payments.
- You may not qualify for the lowest rates without good personal credit.
- It can be harder to qualify without solid experience as a landlord.
- Your loan could be called due if the DSCR ever falls below requirements.
- Cash-out refinancing reduces your equity. This leaves less of a cushion if values decline.
Always crunch the numbers carefully before refinancing. Make conservative rent projections. And have reserves for vacancies and maintenance.
Is DSCR Refinancing Right for Me?
DSCR refinancing makes sense if:
- You want to tap equity to reinvest or access cash.
- You could benefit from better loan terms like a lower rate.
- Your property has a strong cash flow.
- You have experience as an investor.
- You want flexible qualifying based on the asset rather than your personal finances.
With the right property and loan, a DSCR refinance can provide benefits as an investor. But approach carefully and run the numbers to minimize risk.
Final Tips for Refinancing Investment Property with a DSCR Loan
Refinancing with a DSCR loan can unlock benefits, but there are risks. Keep these final tips in mind:
- Shop multiple lenders – Compare loan terms, rates, fees, and DSCR requirements.
- Check loan costs – Account for all upfront fees in your decision.
- Be conservative – Use realistic rent projections and expenses in your calculations.
- Keep reserves – Have a safety net for vacancies, repairs, and variable income.
- Monitor DSCR – Keep an eye on your ratio over time in case the market shifts.
- Ask questions – Clearly understand qualifications and risks before committing.
With the right approach, a DSCR refinance can provide flexible options for withdrawing equity from an investment property. But make sure the numbers add up with some wiggle room for uncertainty.