See exactly what happens when you refinance your hard money loan into permanent financing. Calculate your new payment, cash out, DSCR, and return on investment.
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A hard money refinance is the process of replacing a short-term, high-interest hard money loan with a permanent, lower-rate mortgage. Hard money loans are designed as temporary financing for real estate investors. They fund the acquisition and renovation of investment properties at interest rates between 10% and 15% with terms of 6 to 24 months. They are not intended to be held long-term, and every month you hold one costs real money.
Refinancing is your planned exit strategy. Once the property is stabilized (rehab complete, tenant in place, property appraised at its improved value), you replace the expensive short-term debt with a 30-year fixed rate mortgage at 7% to 8%. The immediate result is dramatically lower monthly payments, long-term payment stability, and in many cases a significant cash-out that you can reinvest into your next deal.
This refinance step is the engine that powers the BRRRR strategy and enables investors to scale from one rental property to dozens using the same pool of capital, recycling it from deal to deal.
Plan your exit before you close on the hard money loan. Know your target ARV, your expected refinance LTV, and your minimum DSCR. Running these numbers through the calculator above before you buy prevents the most expensive mistake in real estate investing: getting stuck in a hard money loan you cannot afford to exit.
BRRRR is a real estate investment strategy that allows you to recycle your capital across multiple deals, building a portfolio of cash-flowing rental properties without needing fresh capital for every acquisition. Each letter represents a step in the process.
Buy — Acquire a distressed or undervalued property below market value. Most BRRRR investors target properties at 65% to 75% of the After Repair Value. Hard money or private money typically funds this acquisition because traditional lenders will not finance properties in poor condition.
Rehab — Renovate the property to bring it to market standards or above. The goal is twofold: make it rentable and increase its appraised value. A focused rehab on kitchens, bathrooms, flooring, and curb appeal typically delivers the highest return on each renovation dollar.
Rent — Place a qualified tenant and begin collecting rent. This rental income will be critical for your refinance: it determines your Debt Service Coverage Ratio and proves the property is a performing asset to your new lender.
Refinance — Replace the hard money loan with permanent financing. If you bought well and rehabbed effectively, the new appraised value will support a loan large enough to pay off the hard money balance and return some or all of your invested capital as cash out.
Repeat — Take the recovered capital and fund your next acquisition. Each cycle builds your portfolio while your tenants pay down the mortgages and the properties appreciate over time.
Ready to see if your deal pencils? Model your refinance numbers now.
Use the Calculator ↑Step 1: Acquisition. You find a property with significant value-add potential and secure a hard money loan, typically covering 70% to 90% of the purchase price and sometimes a portion of the rehab budget. You bring the remaining capital as your down payment and rehab reserves.
Step 2: Renovation. Execute the rehab according to your scope of work and budget. Experienced BRRRR investors complete renovations in 2 to 4 months to minimize hard money carry costs. Every month on a 12% loan costs you 1% of the loan balance in interest alone.
Step 3: Stabilize. Once rehab is complete, list the property for rent and secure a tenant with a signed lease. Some investors begin the refinance process with a signed lease in hand even before the tenant moves in. The property needs to appraise at or above your projected ARV.
Step 4: Refinance. Apply for permanent financing. The lender orders an appraisal of the renovated property. Your new loan amount equals the appraised value multiplied by the LTV percentage. That new loan pays off the hard money balance, and any surplus comes back to you as cash out at closing.
Step 5: Repeat. The cash returned at refinance becomes the seed capital for your next BRRRR deal. If executed well, you can complete 3 to 4 BRRRR cycles per year using the same pool of capital.
| Feature | Hard Money | DSCR Loan | Conventional |
|---|---|---|---|
| Purpose | Acquisition & rehab | Permanent hold | Permanent hold |
| Interest Rate | 10% – 15% | 7% – 8.5% | 6% – 7.5% |
| Loan Term | 6 – 24 months | 30-year fixed | 30-year fixed |
| Qualification | Property & experience | Property income (DSCR) | Borrower income (DTI) |
| Documentation | Minimal | No tax returns | Full documentation |
| Max Properties | Unlimited | Unlimited | 10 (Fannie Mae) |
| LLC Ownership | Yes | Yes | No (personal name) |
| Prepayment Penalty | Usually none | Often 3-5 year | None |
| Cash-Out | N/A | Yes, up to 75-80% LTV | Yes, up to 75% LTV |
Timing your refinance requires balancing two competing factors: speed and readiness. Every month you hold a hard money loan costs money. On a $225,000 balance at 12%, that is $2,250 per month in interest alone. But refinancing before the property is fully stabilized can result in a lower appraisal, reduced cash out, and a weaker DSCR ratio.
The seasoning requirement is your primary timing constraint. Most conventional lenders require 6 months of ownership before they will refinance. Many DSCR lenders also default to a 6-month seasoning period, though some offer programs with 3-month or even day-one seasoning at the trade-off of lower maximum LTV or higher rates.
The 6-month rule: If you refinance before 6 months of ownership, most lenders will use the lower of the purchase price or current appraised value as the basis for your loan, not the improved ARV. This eliminates the value-add benefit of your renovation and dramatically reduces your cash out. After 6 months, lenders typically use the full current appraised value.
Start your refinance application 30 to 45 days before your hard money loan matures. Most permanent loans take 30 to 45 days to close. If your hard money term is 12 months, begin the refi process around month 10 for a seamless transition without a gap or extension fee.
| Factor | DSCR Loan | Conventional | FHA |
|---|---|---|---|
| Best For | Portfolio investors | Low-count investors | Owner-occupant investors |
| Qualification | Property DSCR ≥ 1.0 | Borrower DTI ≤ 45% | Borrower DTI ≤ 50% |
| Typical Rate | 7% – 8.5% | 6% – 7.5% | 5.5% – 7% |
| Max LTV (refi) | 75% – 80% | 75% | 80% – 85% |
| Seasoning | 0 – 6 months | 6 months | 6 – 12 months |
| Documentation | Lease, appraisal | Tax returns, pay stubs | Full documentation |
| Property Limit | Unlimited | 10 financed | 1 (primary residence) |
| LLC Allowed | Yes | No | No |
For most BRRRR investors, the DSCR loan is the optimal refinance path. It requires no tax returns, there is no limit on financed properties, and the property can remain in your LLC. Conventional loans offer lower rates but cap you at 10 financed properties and require full income documentation. Compare all refinance options →
Cash out at refinance is determined by a straightforward formula: New Loan Amount minus Hard Money Payoff equals Cash Out. To maximize that number, you need to increase the new loan amount and minimize the hard money balance at payoff.
Maximize ARV. This is the most powerful lever available to you. Every dollar increase in After Repair Value at 75% LTV puts 75 cents in your pocket at refinance. Focus rehab spending on improvements that appraisers value most: updated kitchens, renovated bathrooms, new flooring, and strong curb appeal.
Choose the right LTV. Higher LTV means more cash out but also a higher monthly payment and potentially a weaker DSCR. Most DSCR lenders allow 75% to 80% LTV on cash-out refinances. Use the scenario tester in the calculator above to find your optimal LTV balance point.
Shop rates aggressively. Every 0.25% reduction in your permanent rate lowers your monthly payment by approximately $15 per $100,000 borrowed. Over 30 years that compounds significantly, and it improves your DSCR and cash flow metrics immediately.
Minimize hard money costs. Complete your rehab quickly to reduce interest carry. Negotiate points at origination. Some lenders offer no-point options at slightly higher rates, which can be worthwhile if your hold period is short.
Before the appraiser visits, prepare a scope of work document listing every improvement you made with before-and-after photos. Provide comparable sales that support your ARV estimate. Appraisers appreciate organized investors, and the supporting documentation you provide can positively influence their valuation.
Refinancing too early. If you refinance before the seasoning period ends, you lose the ability to use the full ARV. On a property purchased for $200,000 with an ARV of $350,000, refinancing at 75% LTV before seasoning gives a loan based on $200,000 ($150,000) versus after seasoning based on ARV ($262,500). That is $112,500 in lost borrowing capacity.
Overestimating ARV. Optimistic ARV projections are the leading cause of failed BRRRR exits. Always use conservative comparable sales: sold properties within half a mile and the last 6 months, with similar square footage and condition level.
Underestimating rehab costs. Budget overruns reduce your profit margin and can push your total investment above the new loan amount, eliminating full cash recovery. Add a 10% to 15% contingency to every rehab budget from the start.
Ignoring DSCR. A property that does not generate enough rental income to achieve a 1.0 DSCR will not qualify for a DSCR loan. Run the DSCR calculation before you buy to confirm the rental income supports the debt service on your projected loan amount.
Not accounting for closing costs. Refinance closing costs typically run 2% to 4% of the new loan amount. These come out of your cash out proceeds or must be paid from reserves. Always factor them into your capital recovery analysis.
DSCR (Debt Service Coverage Ratio) measures whether the property's net operating income covers the mortgage payment. A DSCR of 1.25 means the property generates 25% more income than needed to service the debt. Most DSCR lenders require a minimum of 1.0, with the best terms and rates available at 1.25 and above. Learn more about DSCR →
LTV (Loan-to-Value) determines your loan amount and therefore your cash out. At 75% LTV on a $375,000 property, your loan equals $281,250. Higher LTV means more leverage and more cash out, but also higher monthly payments and a lower DSCR. The sweet spot for most BRRRR refinances falls between 70% and 75% LTV.
Cash-on-Cash Return measures the annual return on the capital you have invested in the deal. If you leave $25,000 in the deal and the property produces $6,000 per year in net cash flow, your cash-on-cash return is 24%. If your refinance recovers all capital, the return is technically infinite since you are earning cash flow on zero invested dollars.
Most permanent lenders require a seasoning period of 6 months from the date you purchased the property. Some DSCR lenders offer 3-month seasoning or even day-one refinance programs, but these typically come with higher rates or lower LTV limits. The key factor is having a stabilized property with rehab complete and a tenant in place.
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It is a real estate investment strategy where you purchase a distressed property below market value with hard money, renovate it, rent it to a tenant, refinance into permanent financing to recover your capital, then repeat with the recovered cash. Read our full BRRRR strategy guide.
Yes, full cash recovery is possible when your After Repair Value is high enough relative to your total project cost. If your new loan amount (ARV multiplied by LTV%) exceeds your total investment (purchase plus rehab), you recover all capital and potentially pull out additional cash. This requires buying at a significant discount and adding substantial value through renovation.
For a DSCR loan refinance, most lenders require a minimum credit score of 660 to 680, with the best rates available at 720 and above. Conventional loans typically require 680 or higher. FHA refinances require a minimum of 580 for maximum LTV. Your credit score affects both the interest rate offered and the maximum LTV available.
DSCR loans are better for most investors because they qualify based on property income rather than personal income. No tax returns, no DTI limits, and no 10-property cap. Conventional loans offer lower rates but require full income documentation and are limited to 10 financed properties. Choose DSCR if you are scaling; choose conventional if you have few properties and strong W-2 income. Compare all options →
A seasoning requirement is the minimum time a lender requires you to own a property before they will refinance it. Most conventional lenders require 6 months. DSCR lenders vary from 0 to 6 months depending on the program. Before the seasoning period ends, many lenders use the lower of purchase price or appraised value as the loan basis, which eliminates your value-add benefit.
ARV (After Repair Value) is the single most important number in your refinance. Your new loan amount equals ARV multiplied by LTV%. A higher ARV means a larger loan, more cash out at refinance, and better odds of achieving full capital recovery. Every dollar of ARV increase translates to 75 cents of additional borrowing capacity at 75% LTV.
Yes. DSCR loans allow the borrower to be an LLC, which is one of their major advantages for investors focused on asset protection. The property can remain titled in your LLC throughout the refinance process. Conventional and FHA loans require the property to be in your personal name. Learn about DSCR refinancing →