Doing a cash out refinance is one of the best tools in a real estate investor’s arsenal. But is it always the right move?
Recently, I faced this very question with my Dougie Fresh Duplex.
With the property’s solid performance and rising values in Detroit, it seemed like the perfect time to tap into that built-up equity.
But giving up my lower interest rate wasn’t an easy decision. So why did I ultimately choose to go ahead with a cash out refinance?
In this post, I’ll walk you through my thought process, the benefits, and the drawbacks of doing a cash out refinance.
Let’s dive in.
Why I Decided to Refinance Dougie Fresh
The Dougie Fresh Duplex has been a solid performer since I bought it in 2019. I purchased the property for $62,000 and invested only a few thousand dollars into some light cosmetic improvements.
You can read all about that property and how it’s performed over the years on its rental performance page.
In short, I ended up doing delayed financing on this duplex with an appraised value of $65,000 and a loan of $45,500 at a 5.25% rate.
Here are the original loan details from my 11/1/2024 statement:
For the last 5 years I’ve done very little to the property but it’s been a huge producer, netting nearly $1,000 per month.
Knowing that prices have moved up a fair bit in the area, I’ve been tempted to do a cash out refinance.
But I was also hesitant to give up my lower interest rate and concerned about decreasing my net cash flow.
However, when I weighed the benefits against these drawbacks, I ultimately decided that the refinance was the right move.
Let’s look at my thought process and why I ultimately decided a cash out refi is a good idea.
Benefits of a Cash Out Refinance
There are a lot of benefits to doing a cash out refinance. And I may not be nailing them all here but these are the main ones I’ve considered.
While everyone likely has different motivation, as a real estate investor these are the three most important things to me.
Increasing My Interest Deduction
One of my primary motivations for refinancing the Dougie Fresh Duplex was to increase my interest expense deductions.
Why would I want to do that?!
As I mentioned in My Plan To Pay No Taxes On Rental Income, reducing my rental income tax liability is a key goal.
Refinancing can often lead to a larger monthly payment, but it also typically means a higher percentage of that payment goes toward interest, especially when resetting the debt clock.
At first glance, this might seem like a downside.
However, in real estate investing, increasing interest payments can actually be advantageous because they provide more mortgage interest deductions.
The result? More deductions, lower tax liability, and ultimately keeping more of the money I earn from my properties.
Is A Cash Out Refinance Taxable?
Another huge benefit of a cash out refinance is how it’s viewed by the IRS.
After completing the cash out refinance on the Dougie Fresh Duplex, I received a wire transfer of nearly $103,000.
This is tax-free money!
And it’s one of the biggest benefits of doing a cash out refinance.
The proceeds from a cash out refinance are not considered income by the IRS, which means there’s no tax owed on the money you receive.
Unlike selling a property, where you’d face capital gains taxes, refinancing lets you access your equity without triggering a taxable event.
If you’re wondering, “Is a cash out refinance taxable?”—the answer is no. That’s what makes it such a powerful tool for growing your portfolio without giving a big chunk of your profits to the government.
Yes, my monthly payment has increased, but I see that as a benefit due to the interest expense deduction.
Plus, I now have a nice chunk of tax-free capital to invest.
Improving My Portfolio Flexibility
Another big advantage of doing a cash out refinance is the ability to reinvest the money you pull out.
Whether you’re using it to buy another rental property, make improvements on your existing properties, or simply as a cash reserve, having liquidity gives you more options.
When people talk about scaling their rental portfolio, there is no better tool than capital.
And there’s no better capital than 30-year fixed-rate debt.
For the Dougie Fresh Duplex, the money I pulled out will allow me to invest in more cash-flowing properties.
While I don’t have definitive plans for my cash-out proceeds yet, I know that building up my cash reserve now gives me the flexibility to make my next move, whatever it may be.
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Potential Drawbacks of a Cash Out Refinance
Of course, a cash out refinance isn’t all upside. Like anything, there are tradeoffs. Here are a few key drawbacks I considered before pulling the trigger.
Let’s look at somethings to consider and why a cash out refinance may not make sense for some people.
A Cash Out Refinance Means Higher Monthly Payments
Refinancing at a higher interest rate obviously means higher monthly payments.
For the Dougie Fresh Duplex, my monthly payment is going from $251.25 to $1,028.00.
For me, this isn’t a dealbreaker.
The benefits I outlined above far outweigh the higher monthly payment. But we’re all different, and what’s reasonable to me may not be palatable to you.
Reduced Cash Flow
A cash out refinance doesn’t always result in decreased cash flow, but it definitely is in my situation. I’m increasing my interest rate on a higher appraised value.
It’s a double whammy.
With the increased payment, my monthly cash flow will take a big hit.
This is something you have to weigh—if your property’s cash flow is slim, a cash out refinance could put you in a position where the rental income no longer covers your expenses.
For me, the Dougie Fresh Duplex was already netting $1,000 per month in cash flow. So even with this increased monthly payment I’ll still be generating $223 a month.
That said, if I was in a place in life where I was dependant on my cash flow, a cash out refinancing may not be a good idea.
Resetting the Debt Clock
Refinancing effectively resets your mortgage, which means you’re starting the amortization schedule over again.
This can be beneficial from a tax perspective (more interest payments = more deductions), but it does mean it’ll take longer to fully own the property.
If having a paid off property is important to you, this is something to consider.
For me, I have no interest in paying off my properties any time soon.
I believe long-duration, fixed debt is absolutely magical and I’ll take all I can get! But many people don’t feel the same way so you need to decide where you fall on that spectrum.
So Is a Cash Out Refinance a Good Idea?
A cash out refinance is one of the best tools for real estate investors, but it’s important to weigh both the pros and cons.
For the Dougie Fresh Duplex, the benefits—including tax-free cash, more deductions, and greater portfolio flexibility—made it the right choice, even with the higher interest rate and increased payments.
If you’re thinking about whether a cash out refinance is the right move for your property, it all boils down to your goals.
Do you want to scale your portfolio, access tax-free cash, or cut down your tax liability? If so, a cash out refinance could be the perfect tool to help you get there.
But if you’re more conservative or don’t have aggressive plans to grow your portfolio, it may not be the right decision.
Like most things, it’s highly personal and you need to weigh your specific situation carefully. I hope this article helps in that process!