Although banks are rarely willing to allow borrowers to cash out the equity in a property unless the funds will be used to improve that property, hard money and private capital lenders are often willing to approve such loan requests. For the savvy real estate investor, cash-out loans can be a useful tool to leverage properties that have equity within your investment portfolio to purchase new properties. Here are two reasons that investors choose to get a cash-out loan against a rental property they already own in order to purchase additional properties to add to their existing portfolio:

1. Cash-out loan interest rates are often lower than what you can earn from the new rental property that will be purchased with the funds obtained from the equity of the existing property. Thus, the higher rate of return from the new property more than covers the cost for the funds to purchase it. Additionally, by using a rental property to secure the cash-out loan, that property itself may produce enough income to cover the costs of the loan. You should also keep in mind the potential of capital gain in the new property.
2. Cash-out loans can also be useful if you find it necessary to end an investment partnership. Whether you need to buy out a partner who is choosing to leave or one who is more problematic and potentially costing your bottom line, a cash-out loan can solve the problem by providing you with the necessary funds to buy yourself out of a costly partnership without risking the loss of your portfolio, either in part or in its entirety.

How Cash-Out Loans Secured by Rental Properties Work

Typically, the interest rate for hard money loans against rental properties ranges between 9 and 12 percent, depending on the particular lender and various other factors that are involved (e.g., income production, vacancy rates, type of tenants, turnover, etc.). Investors will sometimes choose to take a cash-out loan against a portfolio of rental properties rather than one single property. In such circumstances, lenders may require either a minimum number of properties or a minimum value for the portfolio. Combining the equity of multiple properties can give the investor considerably more funds to use to purchase more properties to expand and diversify a portfolio without having to request loans for each new individual property purchase. The investor must remember that hard money lenders typically only fund first mortgage secured loans.

While this strategy works best with properties that were originally paid for with cash, it is possible to use cash-out loans to pay off existing bank loans and refinance a mortgaged property in certain circumstances. The more equity or additional value that you can demonstrate for such a property, the better chance you have of obtaining a cash-out loan against it.