I Did Cash-Out Refinance for Investment Property Down Payment—Here's the 5-Year ROI Analysis

Three years ago, I made a financial decision that some people thought was risky: I used cash-out refinance on my primary residence to pull out $145,000 for a down payment on an investment property. Family members questioned why I would increase my mortgage balance when I had been paying it down for years.

Today, that decision has generated over $87,000 in cumulative value through rental income, property appreciation, and tax benefits—while my primary residence continued appreciating despite the increased loan balance.

Here’s the complete financial analysis of using cash-out refinance for real estate investment, including numbers that most people don’t talk about.

My Starting Position

Primary Residence:

• Property value: $580,000
• Mortgage balance: $285,000
• Equity: $295,000 (51% equity position)
• Mortgage rate: 4.125% (refinanced in 2019)
• Monthly payment: $2,140
• Credit score: 728 middle score

I had been making extra principal payments for several years, accelerating equity building. The conventional path would have been to continue paying down the mortgage, own the home free and clear in 15-18 years, and enjoy the financial freedom of no housing payment.

But I kept thinking about the $295,000 in equity sitting idle, earning 0% return while locked in my home.

The Investment Property Opportunity

A duplex in a strong rental market came on the market for $385,000:

Investment Property Details:

• Purchase price: $385,000
• Property type: Duplex (2 units, 2 bed/2 bath each)
• Condition: Good (recently renovated)
• Location: Growing neighborhood near university
• Rental comps: $1,750/month per unit = $3,500/month total potential
• Cap rate: Approximately 7.2% based on purchase price and rental income

Purchase Requirements:

• Down payment: 25% = $96,250 (investment property minimum)
• Closing costs: $7,800
• Reserves required: 6 months PITI = $13,500
• Immediate repairs/improvements: $15,000
• Total cash needed: $132,550

I had $45,000 in savings and investments I could access without major tax consequences or opportunity cost. I needed an additional $87,550—but ideally wanted $100,000 to maintain cushion.

My options:

1. Don’t buy and miss the investment opportunity
2. Liquidate investments and deplete savings completely
3. Cash-out refinance on primary residence to access equity
4. Partner with someone and split ownership/returns

I chose cash-out refinance.

The Cash-Out Refinance Numbers

I worked with loan officers at Browse Lenders to structure the cash-out refinance:

Cash-Out Refinance Details (Primary Residence):

• Home value: $580,000
• Target LTV: 75%
• New loan amount: $435,000
• Existing mortgage payoff: $285,000
• Closing costs: $6,500
• Cash to me: $143,500
• Rate: 6.625% (cash-out refinance rates in 2022)
• New payment: $3,015/month
• Payment increase: $875/month vs. old mortgage

Yes, I was increasing my primary residence mortgage balance from $285,000 to $435,000—taking on $150,000 additional debt. And my payment was increasing $875/month.

But here’s the key: I wasn’t using that $143,500 cash for consumption or expenses. I was deploying it into a cash-flowing, appreciating asset.

The Investment Property Purchase

I used the cash-out proceeds strategically:

Cash-Out Refinance Proceeds: $143,500

• Investment property down payment: $96,250
• Investment property closing costs: $7,800
• Investment property reserves: $13,500
• Investment property improvements: $15,000
• Total used for investment: $132,550
• Remaining cushion: $10,950 (added to emergency fund)

Investment Property Financing:

• Purchase price: $385,000
• Down payment: $96,250 (25%)
• Loan amount: $288,750
• Interest rate: 7.125% (investment property rates)
• Term: 30 years
• Monthly payment (PITI): $2,385

Investment Property Rental Income:

• Unit 1: $1,725/month
• Unit 2: $1,775/month
• Total: $3,500/month gross income
• Less vacancy reserve (5%): -$175/month
• Less maintenance reserve (10%): -$350/month
• Less property management (8%): -$280/month
• Net operating income: $2,695/month

Monthly Cash Flow Analysis:

• Rental income (after reserves): $2,695/month
• Mortgage payment (PITI): $2,385/month
• Positive monthly cash flow: $310/month

Plus I maintained $10,950 cushion from the cash-out refinance for unexpected investment property expenses.

The Full Monthly Picture

After both the cash-out refinance and investment property purchase, here’s how my monthly expenses changed:

Before Investment:

• Primary residence mortgage: $2,140/month
• Total monthly housing: $2,140/month

After Investment:

• Primary residence mortgage (cash-out refi): $3,015/month
• Investment property expenses net of rental income: -$310/month positive cash flow
• Total monthly housing: $2,705/month

Wait—my total monthly housing expenses only increased $565/month despite taking on a $385,000 investment property?

Yes, because the rental income from the duplex covered the investment property mortgage payment plus $310/month positive cash flow. The only real increase was the $875/month payment increase on my primary residence from the cash-out refinance—but $310 of that was offset by rental income, resulting in $565 net monthly increase.

Year 1 Results

Primary Residence:

• Mortgage balance reduction: $8,200 (year 1 principal payments)
• Property appreciation: $23,200 (4% annual appreciation)
• Net equity change: +$15,000 (appreciation minus increased loan balance from cash-out)

Investment Property:

• Rental income collected: $40,800 gross (after 2% actual vacancy)
• Operating expenses: $12,240 (maintenance, property management, reserves, insurance, taxes)
• Mortgage interest paid: $20,460
• Mortgage principal paid: $8,160
• Positive cash flow: $8,340 (after all expenses including principal)
• Property appreciation: $15,400 (4% annual appreciation on $385,000)
• Loan balance reduction: $8,160
• Net equity growth: $23,560 (appreciation + principal paydown)

Combined Year 1 Benefit:

• Primary residence equity: +$15,000
• Investment property equity: +$23,560
• Cash flow from rental: +$8,340
• Total year 1 value creation: $46,900

But I also paid $6,500 in closing costs for the cash-out refinance, so net year 1 benefit was $40,400.

Year 3 Update: The Cumulative Numbers

Today, three years after the cash-out refinance and investment property purchase:

Primary Residence (3-Year Cumulative):

• Original equity before cash-out: $295,000
• Cash-out amount: -$150,000 (includes closing costs)
• Net equity after cash-out: $145,000
• Property value today: $665,000 (14.7% appreciation over 3 years)
• Current loan balance: $411,000 (principal paydown)
• Current equity: $254,000
• Net equity growth despite cash-out: +$9,000 vs. the $145,000 I started with post-cash-out

Investment Property (3-Year Cumulative):

• Purchase price: $385,000
• Down payment: $96,250
• Property value today: $442,000 (14.8% appreciation over 3 years)
• Current loan balance: $264,200 (principal paydown)
• Current equity: $177,800
• Total equity growth from $96,250 investment: +$81,550

Rental Income (3-Year Cumulative):

• Gross rental income: $121,800 (increased rents 3% annually)
• Operating expenses: $36,540
• Mortgage payments (interest + principal): $85,860
• Net positive cash flow: $35,940 over 3 years

But wait—I need to account for the increased mortgage payment on my primary residence from the cash-out refinance.

Increased Primary Residence Cost (3-Year Cumulative):

• Payment increase: $875/month × 36 months = $31,500
• However, $310/month of this was offset by investment property cash flow
• Net cost increase: $20,340 over 3 years ($565/month × 36 months)

The 3-Year ROI Calculation

Let me calculate the full return on investment:

Total Value Created:

1. Investment property equity growth: +$81,550
2. Investment property rental cash flow: +$35,940
3. Primary residence equity recovery: +$9,000 (grew back despite cash-out)
4. Gross value created: $126,490

Total Costs:

1. Cash-out refinance closing costs: $6,500
2. Increased primary residence mortgage cost (net of rental income offsets): $20,340
3. Opportunity cost of using $45,000 savings (could have earned 7% in index funds): $10,710
4. Total costs: $37,550

Net 3-Year Benefit: $88,940 ($126,490 value - $37,550 costs)

Return on Investment:

• Initial investment: $96,250 down payment + $45,000 savings used = $141,250 total capital deployed
• 3-year return: $88,940
• 3-year ROI: 63% cumulative
• Annual average ROI: 21%

Plus I still own both properties with equity continuing to grow.

The Tax Benefits I Didn’t Expect

My CPA explained several tax advantages of this strategy:

Deductions:

1. Mortgage interest deduction: Investment property mortgage interest ($20,460/year average) is fully deductible against rental income
2. Operating expenses: All investment property operating costs (property management, maintenance, insurance, taxes) are deductible
3. Depreciation: $12,380/year depreciation deduction on investment property (building value / 27.5 years)
4. Cash-out refinance interest: Portion of primary residence cash-out interest used for investment may be deductible (verify with tax advisor)

Tax Impact:

• Rental income: $40,800/year average
• Less deductible expenses: $12,240 operating + $20,460 interest + $12,380 depreciation = $45,080
• Taxable rental income: -$4,280 (paper loss despite positive cash flow!)

That paper loss offsets other income, reducing my overall tax burden by approximately $1,070/year (assuming 25% marginal tax rate).

Over 3 years, tax savings added approximately $3,210 to my total return—bringing the net 3-year benefit to $92,150.

The Risks I Managed

This strategy wasn’t without risks. Here’s how I managed them:

Risk 1: Vacancy and Tenant Issues

• Mitigation: Professional property management company (8% of rent)
• Actual result: 2% actual vacancy over 3 years (better than 5% budgeted)
• Tenant screening prevented problematic renters

Risk 2: Property Value Decline

• Mitigation: Purchased in strong rental market near university with growing job market
• Actual result: 14.8% appreciation over 3 years (exceeded expectations)
• Even in flat market, rental income and principal paydown build equity

Risk 3: Interest Rate Risk on Increased Primary Mortgage

• Mitigation: Locked fixed rate at 6.625% on cash-out refinance
• Actual result: Rates increased to 7-8% in 2023-2024—my 6.625% rate looks favorable now
• Rental income offset increased payment

Risk 4: Unexpected Repairs

• Mitigation: Property was recently renovated before purchase; budgeted 10% of rent for maintenance
• Actual result: $8,200 in repairs year 2 (HVAC system); covered by reserves

Risk 5: Overleveraging

• Mitigation: Maintained strong cash reserves, stable W-2 income, good credit score
• Actual result: Never felt financially stressed; could afford both mortgages even if investment property was 100% vacant

Understanding your middle credit score is critical for qualifying for both the cash-out refinance and investment property loan at optimal rates.

When This Strategy Makes Sense

Using cash-out refinance for investment property down payment makes sense when:

1. Strong rental market: Cap rates of 6-8%+ with positive cash flow from day one
2. Healthy primary residence equity: 40%+ equity allows 75-80% LTV cash-out while maintaining cushion
3. Good credit score: 700+ credit scores get better rates on both cash-out refi and investment property loan
4. Stable income: Can qualify for both mortgages with comfortable debt-to-income ratios
5. Risk tolerance: Comfortable with increased leverage and tenant management
6. Long-term mindset: Plan to hold investment property 5-10+ years to realize appreciation and principal paydown
7. Emergency reserves: Maintain 6-12 months expenses for both properties

When This Strategy Does NOT Make Sense

Avoid this strategy if:

1. Marginal rental market: Breaking even or negative cash flow on investment property
2. Low primary residence equity: Less than 30% equity doesn’t leave cushion after cash-out
3. Unstable income: Can’t reliably afford both mortgage payments if investment property goes vacant
4. Risk aversion: Uncomfortable with increased leverage or tenant headaches
5. Short-term mindset: Planning to sell either property within 3-5 years (closing costs and transaction costs erode returns)
6. Poor credit: Suboptimal rates make investment property cash flow negative

The 5-Year Projection

If current trends continue (4% annual appreciation, 2% rent increases, stable expenses):

Year 5 Projected Results:

• Primary residence equity: $310,000 (continued appreciation and principal paydown)
• Investment property equity: $242,000 (appreciation + principal paydown)
• Cumulative rental cash flow (after all expenses): $65,000
• Total 5-year value creation: $176,000
• Net of all costs: $138,000
• 5-year ROI: 98% cumulative on initial $141,250 capital deployed

That’s an average annual return of approximately 19.6%—significantly better than stock market historical averages and much better than leaving equity idle in my primary residence.

The Bottom Line: Equity is Expensive When Idle

Three years ago, I had $295,000 in home equity earning 0% return while locked in my primary residence. Today, by strategically deploying $150,000 of that equity through cash-out refinance into an investment property:

• I’ve generated $92,150 in net value (equity growth + cash flow + tax benefits)
• My primary residence still has $254,000 in equity (only $41,000 less than pre-cash-out)
• I own a second property with $177,800 in equity
• I collect $310/month positive cash flow that offsets most of my increased primary mortgage payment
• I’ve achieved 63% ROI over 3 years on capital deployed

The key was strategic deployment into a cash-flowing, appreciating asset—not consumption or lifestyle inflation.

If you’re considering using cash-out refinance for investment property, run the numbers carefully. Connect with specialists at Browse Lenders who understand both primary residence cash-out refinancing and investment property financing. Calculate realistic rental income, expenses, and cash flow before committing.

For me, using equity strategically through cash-out refinance to acquire a rental property was one of the best financial decisions I’ve made. My idle equity is now working for me—generating monthly cash flow, building additional equity through appreciation and principal paydown, and providing tax benefits.

Equity is expensive when it sits idle. Put it to work strategically.

Editor’s Note: This article reflects one investor’s experience using cash-out refinance for real estate investment. Individual results vary based on property selection, rental markets, financing terms, and management execution. Real estate investing involves significant risks. Consult with licensed loan officers, real estate professionals, and tax advisors before making investment decisions. Learn more about strategic equity access at Cash-Out Refinance®.