Texas Investment Property Cash-Out Refinance | 2024 Rules

Is a Texas investment property cash-out refinance right for me?

If you own a rental or other investment property, you may need a cash injection to expand your portfolio, improve the homes you own, or build your business. That’s where a Texas investment property cash-out refinance might help.

So, why focus just on the Lone Star State? That’s because it has its own laws governing cash-out refinances, aka Section 50(a)(6) loans. But the regulations that apply to homeowner cash-out refinances don’t generally apply to investment properties. So, Texas investors may have more freedom to negotiate deals with lenders than those in some other states.

In this article (Skip to...)

• What is a cash-out refinance?
• Texas investment property cash-out refinance requirements
• How many times can you cash out an investment property?
• What to consider when cash-out refinancing in Texas
• Other ways to get cash out of a Texas investment property
• The bottom line

What is a cash-out refinance?

A cash-out refinance is a way to release “equity” tied up in real property. And equity is the amount by which the home’s market value exceeds its mortgage balance.

So, suppose one of your rental properties has appreciated and is now worth $300,000. (Zillow reckons the average Texas home value was $306,756 in mid-June, 2024.) Also, suppose the mortgage balance is currently $160,000.

You simply deduct your mortgage balance from the home’s market value to discover that your equity is $140,000. ($300,000 market value - $160,000 mortgage balance = $140,000 equity.)

So, equity is the part of a home’s value that you own. And when refinancing, you can often tap into a portion of your home equity to secure a new loan at a competitive interest rate. Typically, lenders allow you to borrow up to 80-85% of your home’s value, minus your current mortgage balance, which can provide you with additional funds if needed.

Why don’t more people use cash-out refinances?

At the time this was written, cash-out refinance loans were uncommon. That’s because they involve replacing your existing mortgage with a whole new one. And rises in mortgage rates in recent years mean most end up paying a higher interest rate with higher monthly payments than they currently face. Who wants that?

Well, investors might. As entrepreneurs, they must look at:

1. The return they stand to make when reinvesting the equity they release (ROI)
2. Rates, costs, conditions, and risks of alternative forms of borrowing

The most successful investors probably have in-house or third-party advisors to help them with this complicated math as well as any tax implications. Newcomers should get similar advice from professionals.

Is cash-out refinancing allowed for investment properties in Texas?

Absolutely. In fact, Texas investment property cash-out refinances can be easier to get than in some other states, which may be more tightly regulated.

But, of course, deregulated markets are a two-way sword. You’re playing a game with no umpire.

So, you need to protect yourself by accessing plenty of professional advice. Never sign anything without first having it checked by an expert.

Requirements for a Texas investment property cash-out refinance

So, we’ve established there are no legal barriers to Texas investment property cash-out refinances. You can negotiate your own deal. But there are plenty of other obstacles to clear.

First, you need to find willing lenders. These are probably rarer than you hope. And many mortgage lenders don’t necessarily focus on refinancing investment properties, especially when a cash-out is involved.

Still, there are some willing lenders. So, track down as many as you can and shop for mortgage rates with each. Just as homeowners can get wildly better or worse deals on their own homes’ mortgages from different lenders, you’re likely to find the same for investment properties.

Then, you have to qualify for the loan. There are no established eligibility criteria, and they are likely to vary widely from lender to lender.

Eligibility criteria and other requirements

Still, here’s a rough guide to what criteria to expect:

• A credit score of 620-680. But, in some circumstances, you might need 700 or higher
• On rental homes, it’s common for lenders to apply the 2% rule. That means that the rental income of the property should be at least 2% of the total amount secured by the home.
• Cash reserves — Many lenders want you to show you have cash on hand to cover six to 12 months of your newly refinanced mortgage payments
• LTV borrowing cap — Often, you’ll be required to retain 20%-25% of the home’s equity (see above) after you’ve refinanced. In other words, you can’t use the home to secure borrowing of more than 75%-80% of its market value. This is called your loan-to-value (LTV) ratio.
• You’ll need to provide the sorts of documents required for all mortgage applications. So, you should prepare proof of income, tax returns, bank statements, rental agreements, and property insurance. There will likely be other paperwork required by lenders, certainly including a government-issued photo ID and company formation documents, if applicable

It may be possible to find workarounds for one or two of those criteria, but only if you’re a great borrower in other respects. Fundamentally, lenders want to be as sure as they can be that you’re going to make on-time payments until you zero the mortgage.

But, if the criteria prove insurmountable obstacles for you, you may have to find an alternative source of funding.

How many times can you cash-out refinance an investment property?

There’s no legal or formal limit on the number of Texas investment property cash-out refinances you can carry out. But read on.

Some states, including Texas, impose seasoning periods (typically, you’re required to wait six months) on homeowners wishing to perform a cash-out refinance. You have to wait x months after your most recent financing or refinancing before you can refinance.

Now, that legal requirement does not apply to a Texas investment property cash-out refinance. But you can be sure that too frequent refinances will be viewed by lenders with alarm. You’ll need a valid reason to explain frequent refinances or may otherwise raise some red flags.

Important factors to consider when cash-out refinancing in Texas

The biggest issue with a Texas investment property cash-out refinance is high mortgage rates. It’s the same everywhere. And it will continue to be so until those rates fall significantly.

In the meantime, it’s highly likely you’ll be trading in a lower interest rate for a higher one — with higher monthly payments. And that makes little sense unless you can invest the equity you release to cover those higher outgoings and then some.

You’re probably already aware that mortgage loans to businesses typically come with appreciably higher investment property rates and closing costs than those to private homeowners. If you’re not, prepare for a shock. Also, rates and costs for cash-out refinances tend to be noticeably higher than those for fresh mortgages and other types of refinancings.

Real estate investors must always be aware that property values can go down as well as up. And a down period could play havoc with your business plan and cash-flow forecasts. So, prepare for the worst and hope for the best.

In the next section, we’ll explore other ways to borrow that can sometimes be better than a cash-out refinance for an investment property.

Other ways to get cash out of a Texas investment property

Don’t see a Texas investment property cash-out refinance as your only way forward. It may be your best move but often it won’t be.

As we’ve already mentioned, refinances involve taking on a whole new mortgage, meaning every cent you owe on the home will attract interest at a higher rate than previously. But it’s often possible to leave the main mortgage and rate in place and pay a higher rate only on your new borrowing.

This is where home equity loans and home equity lines of credit (HELOCs) come in. (Those links take you to articles intended for homeowners who occupy their properties but they give you a flavor of what to expect. Remember, rates and costs are almost always higher for business borrowers.)

A home equity loan is a straightforward installment loan, generally with a fixed interest rate. You borrow a lump sum and repay it in equal monthly payments over the term you selected. One of these is highly predictable and cash flow surprises are unlikely.

With home equity lines of credit, the emphasis is on flexibility rather than predictability. A HELOC provides a line of credit. So, you can borrow, repay, reborrow and re-repay as often as you want up to your credit limit. And you pay interest only on your balances.

So far, so much like a credit card. But there are important differences. With a HELOC, you start with an interest-only draw period that might last a decade. But, when that expires, you must either refinance or enter the repayment period. Now, you can’t borrow anymore, but instead you must zero your balance over another agreed loan term, sometimes 10-20 years.

For consumers, HELOCs sometimes come with zero closing costs. But it’s unlikely that deal will be offered to businesses.

Loans that don’t tap equity

Both home equity loans and home equity lines of credit are second mortgages. So, the home is at the same risk of foreclosure as it would have been with a cash-out refinance.

Of course, you may be able to avoid that risk with a personal loan or peer-to-peer loan that doesn’t require you to secure the loan on the property. Or, if you own a successful company, a bank may be willing to offer it a commercial loan.

All these are worth considering before you finally decide for or against a Texas investment property cash-out refinance. Get multiple quotes for each type of loan and pick the one that’s most advantageous to your business.

The bottom line

A Texas investment property cash-out refinance is largely unregulated. So it’s a smart move to protect yourself by consulting your own professional advisor before making any decisions.

Currently, the main downside to a cash-out refinance is that you’ll likely pay a higher rate on your new mortgage than your existing one. That will change if mortgage rates fall. But it’s a big issue for now.

You may be able to avoid the worst of that issue by keeping your existing mortgage and tapping your equity through a home equity loan or HELOC. These are second mortgages so their rates tend to be lower than most forms of borrowing but often higher than a mortgage refinance. You might also explore personal loans, commercial loans and peer-to-peer lending platforms.

Due diligence

The only way you can be sure you are choosing the best form of financing is to obtain multiple quotes for each different option. Then, run them by an accountant.

Bottom line, it’s your bottom line that counts. And that’s all about math and risk.