Apartment Cash-Out Refinance: How Much You Can Pull

Short answer

In an apartment cash-out refinance, the lender sizes the new loan at the lowest of its LTV, DSCR and debt yield limits. Your cash is that loan minus the payoff, any prepayment cost, closing costs and reserves. Agency programs publish up to 80% LTV at 1.25x DSCR; HUD 223(f) caps cash-out at 80% of value or the cost to refinance.

How much cash a refinance gives you

Your cash is the new loan minus four things: the payoff on the current loan, any prepayment cost on it, the closing costs of the new loan, and the reserves and escrows the new lender collects at closing. Equity on paper is not cash. A building worth $3 million more than its loan can produce far less than that, or nothing, once the lender's tests and the deductions are applied.

The new loan is the lowest of the lender's limits. LTV multiplies the appraised value by the program maximum. DSCR takes the NOI the lender underwrites, divides it by the minimum coverage, and converts that payment into a loan at the new rate and amortization. Some lenders add a debt yield floor. Whichever limit is smallest is the loan.

A worked example

A hypothetical: your building appraises at $6,000,000 and the lender underwrites NOI of $420,000. The lender offers 75% LTV, a 1.25x minimum DSCR, a 6.0% rate and 30-year amortization. The current payoff is $2,500,000 and the loan is in its open window, so there is no prepayment cost.

LTV limit: $6,000,000 times 75% is $4,500,000.
DSCR limit: $420,000 divided by 1.25 is $336,000 of annual debt service, which supports about $4,670,000 at a 6.0% rate on 30-year amortization.
LTV is lower, so the loan is $4,500,000.
Less the $2,500,000 payoff, closing costs of 2% of the new loan ($90,000) and $30,000 of reserves.
Net cash to you: $1,880,000.

Two sensitivities matter. If the appraisal comes in $500,000 lower, LTV still binds and the loan falls by $375,000, dollar for dollar out of your cash. If the rate is higher, the DSCR limit drops toward the LTV limit and eventually becomes the one that binds. Run your own numbers here:

Cash-out refinance calculator

Appraised value ($)Net operating income ($/yr)Current loan payoff ($)Prepayment cost ($)Yield maintenance, defeasance or step-down fee. 0 if you are in the open window.New loan rate (%)Amortization (years)Max LTV for cash-out (%)Cash-out caps are often below rate-and-term caps. Use your lender's number.Min DSCR (x)Closing costs (% of new loan)Reserves and escrows at closing ($)

Max loan by LTV–

Max loan by DSCR–

New loan–

Limit that binds–

Closing costs–

Cash to you at closing–

DSCR at that loan–

Estimates only, not a loan quote.

What shrinks the number

The lender's NOI is lower than yours

Lenders underwrite with a vacancy floor, a management fee even if you self-manage, and replacement reserves per unit, and they often trend taxes and insurance up. On a DSCR-bound deal at a 1.25x minimum, 30-year amortization and rates between 5% and 6.5%, every dollar of NOI they remove costs you roughly $10.50 to $12.40 of loan. Restate your trailing-12 with the T-12 underwriting calculator before you count the cash.

Prepayment on the old loan

Yield maintenance and defeasance can be large when the old loan's rate is above current Treasury yields and has years left. It comes straight out of proceeds. If you are a year or two from an open window, compare paying it now with waiting, using the refinance break-even calculator. Background on each type is at prepayment penalties.

Lower leverage on cash-out

Program maximums are ceilings. A lender can size a cash-out deal below the published LTV, and on Freddie Mac Conventional Small the maximum is already 75% for terms of 5 to under 7 years. Test your numbers at a lower LTV before you plan around the money.

Reserves and repair escrows

The property condition report sets a repair list, and lenders usually escrow some or all of it at closing along with tax, insurance and replacement reserves. That money is yours on paper and the lender's in practice until it is released.

Program rules that cap cash out

Fannie Mae and Freddie Mac

Fannie Mae's Small Mortgage Loan term sheet lists refinance as eligible with a maximum LTV of 80% and a minimum DSCR of 1.25x. Its guide also requires post-closing liquidity of at least 9 months of principal and interest, and the cash you take out does not count toward it. Freddie Mac's Conventional Small loan allows 75% LTV on 5 to under 7-year terms and 80% on 7 years or longer, at 1.25x. Freddie also runs a Refinance Test, which checks whether the loan could be refinanced at maturity; it is waived when the loan has an amortizing DCR of 1.40x or more and LTV of 60% or less. Freddie does not permit hard subordinate debt on Conventional Small, so you cannot add a second mortgage behind it from another lender.

HUD 223(f)

HUD's 87% market-rate LTV does not apply to cash out. When you take cash out, the loan is sized at HUD's Criterion 10, which the MAP Guide sets at the greater of 80% of value or the cost to refinance, and HUD's 2025 increase to the other ratios left that test unchanged. HUD also holds back proceeds in two cases. If repairs are deferred until after closing, 50% of the cash-out proceeds stay in escrow until the repairs are done and HUD approves the release. If the certificate of occupancy is less than 3 years old, 50% of the available cash is held as a debt service reserve until the property hits the minimum DSCR for six consecutive months.

Bank, CMBS and life company loans

Each lender sets its own cash-out limits. Some size cash-out loans at the same LTV as a rate-and-term refinance; others cut leverage, require a minimum hold period, or ask what the money is for. Ask before you apply, not after the appraisal.

The alternative: a supplemental loan

If your current loan is agency debt with a large prepayment cost and years left, a supplemental loan can raise cash without paying it off. Fannie Mae's supplemental loans are available 12 months after the senior loan closes, through the lender that services it, with the term sheet listing a maximum LTV as high as 70% and a minimum DSCR as low as 1.30x depending on asset class and use of proceeds. Fannie must be the only debt holder on the property, and a new appraisal is required. Freddie Mac Conventional Small also allows supplemental loans, subject to its loan agreement. See Fannie Mae supplemental loans and Freddie Mac supplemental loans.

The trade: no prepayment cost on the first loan, but two loans with two maturities (Fannie allows the supplemental to be coterminous with the senior or not), and a supplemental rate that is priced on its own, not at the senior loan's rate.

Before you apply

Get a payoff statement and the prepayment cost as of your target closing date.
Restate NOI the lender's way, then size the loan at a conservative value and a lower LTV than the maximum.
Build a line-item cost estimate with the closing cost estimator; see refinance closing costs for what each line is.
Decide what the cash is for. If it funds a renovation or another purchase, the timing of the refinance has to fit that plan, not the other way around.
Ask your tax advisor how a cash-out affects you before you rely on the proceeds. This page does not give tax advice.

Frequently asked questions

How much cash can I take out of my apartment building?

Take the lowest of the lender's limits (LTV times appraised value, the loan your NOI supports at the minimum DSCR, and any debt yield limit), then subtract your payoff, prepayment cost, closing costs and reserves. Agency programs publish up to 80% LTV at a 1.25x minimum DSCR, and HUD 223(f) caps cash-out loans at 80% of value or the cost to refinance. Lenders can size below these maximums.

Can I do a cash-out refinance with a HUD 223(f) loan?

Yes. HUD permits cash out, but the loan is limited at Criterion 10, which the MAP Guide sets at the greater of 80% of value or the cost to refinance, rather than the 87% that applies to market-rate refinances without cash out. If repairs are deferred, HUD escrows half of the cash-out proceeds until they are complete, and newer properties have half held as a debt service reserve.

Is a supplemental loan better than a cash-out refinance?

It can be when your current Fannie Mae or Freddie Mac loan has years left and an expensive prepayment premium. A supplemental loan adds a second agency loan without paying off the first, so there is no prepayment cost. Fannie's are available 12 months after the senior loan closes, at up to 70% LTV and as low as 1.30x DSCR depending on the deal. You end up with two loans, and the second is priced on its own terms.

Why is my cash-out smaller than my equity?

Because lenders lend against a percentage of value, not all of it, and often against income rather than value. At 75% LTV, a quarter of the value stays in the building. If the DSCR test binds, the loan is smaller still. Then payoff, prepayment cost, closing costs and reserves come out. The gap between equity and cash is normal; the question is whether what remains is worth the new loan's cost.

Can I add a second mortgage instead of refinancing?

Not on every loan. Freddie Mac does not permit hard subordinate debt on Conventional Small, and Fannie Mae requires that it be the only debt holder on a property with a supplemental loan. Your existing loan documents decide what is allowed. Where outside subordinate debt is barred, mezzanine debt or preferred equity at the ownership level may be an option if your loan documents allow it, at a higher cost.