The Quick Read: A DSCR cash-out refinance can fund a cash-for-keys buyout, but the loan cannot pay the tenant before it funds, so the buyout is either paid from cash on hand or from proceeds after funding. The order you choose changes which rent the lender counts, how large the new loan is, and how much coverage you keep. Choose the sequence before you make the tenant an offer.
- Cash for keys is a voluntary written agreement: the tenant leaves by a set date and returns the keys, and the owner pays an agreed amount.
- Cash-out proceeds arrive at funding, so any buyout paid before then comes from your own cash.
- The lender counts the lower of the signed lease or the appraiser’s market rent, so a below-market tenant may be costing you coverage.
- Borrowing more cash out lowers the coverage ratio, and the loan-to-value ceiling limits how much you can take.
- A coverage ratio at or above 1.00 means rent covers the payment. It does not mean the property cash flows.
What Is Cash for Keys, and Is It Legal?
Cash for keys is a written contract in which the tenant agrees to move out by a set date, leave the unit in an agreed condition, return every key, and accept a payment. The tenant is free to say no. The appeal is simple, and BiggerPockets frames it as a cost comparison: paying a tenant to leave is often cheaper than an eviction with its filing fees, legal costs, and months without rent.
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The practice is voluntary and generally lawful, but local rules vary. Some rent-controlled cities require a written disclosure before buyout talks and a filing after signing. Check your city and county before you make an offer, and have the agreement reviewed if the property sits under local rent rules.
A second question follows: where does the money come from? For owners with equity, a DSCR cash-out refinance is one answer. It also creates sequencing problems that the agreement itself never touches.
How Does a DSCR Cash-Out Treat an Occupied or Vacant Rental?
Underwriting starts from one question: what rent will the lender count? The answer comes from an appraiser’s rent opinion, reported on Form 1007 for a single-family home or Form 1025 for a two-to-four-unit building.
Three practical rules follow from that.
- A lease above market adds nothing. The excess rent is ignored.
- A lease below market caps the ratio. The lender counts the lease figure, even if the unit would rent for more.
- A vacant property is not automatically ineligible. The appraiser’s market rent can stand in for a lease. Some programs prefer or require a leased property on a cash-out, so check the program before you empty the unit.
Condition matters as much as occupancy. A vacant unit still has to be rent-ready, and the file still needs rent evidence, property documents, entity papers where an LLC holds title, and reserves. A unit stripped to the studs after a buyout may fail that test.
Qualification runs primarily on property-level rental income covering the payment, subject to lender guidelines. A cash-out refinance carries a hard ceiling of 75% loan-to-value on a standard rental, and the common seasoning expectation is about six months of ownership, measured from title recording. Short-term-rental collateral is typically capped lower, around 70% on a cash-out. The complete DSCR loans guide walks through the full program framework.
Which Sequence Works Best: Buy Out First or Refinance First?
There are three workable orders. Each trades documentation quality against cost, risk, and vacancy time. The comparison below reflects how the underwriting logic works, not a promise about any one file.
| Path | Flow | Underwriting effect |
|---|---|---|
| A. Buy out, then refinance vacant | Tenant leaves, unit is rent-ready, appraisal runs on the vacant unit | Market rent alone counts; some programs prefer a lease |
| B. Refinance, then buy out | Close the cash-out with the tenant in place, then pay the buyout from proceeds | Lower of lease or market rent applies; loan must cover the larger obligation |
| C. Buy out, re-tenant, then refinance | Tenant leaves, unit is re-leased at market, refinance runs on the new lease | Cleanest rent evidence; costs vacancy time |
Path A suits an owner with cash on hand and a property in good shape. You remove the tenant first, finish any cosmetic work, and let the appraiser’s market rent carry the file. The risk is that a lender or program wants a lease, and you have now paid for a vacant unit.
Path B is the direct way to fund a buyout with a cash-out. The loan closes with the tenant still in place. Proceeds then fund the buyout and turnover costs. The catch is that a below-market lease holds the ratio down at exactly the moment the loan is getting bigger.
Path C gives lenders the strongest paper trail: a fresh lease at market rent, a deposit that matches the lease, and proof of payment. You pay for it in vacancy months.
One point is worth stating plainly. Cash-out proceeds are not available until the loan funds. A buyout that has to be paid before funding needs another source, such as savings or a short-term bridge. This is a structural point, not a program rule, so plan the cash before you promise the tenant a date.
Why Does a Below-Market Tenant Change the Math?
A below-market lease is the strongest case for a buyout, and it is also where investors overreach. Because the lender counts the lower of lease or market rent, removing a tenant who pays well under market can lift counted rent toward the appraiser’s figure. A higher counted rent lifts the coverage ratio on the same loan.
Picture an investor holding a duplex where one side rents far below market on a long-standing lease. A cash-out with that tenant in place counts the low lease figure on that unit. After a buyout and a re-lease at market, the counted rent rises. The same loan covers better, or a larger cash-out clears the same ratio.
Three cautions apply. Market-rent opinions vary from one appraiser to the next, so the lift is an estimate rather than a guarantee. A re-lease takes time, and the vacancy is on you. And if the unit is hard to rent, you have traded a low-paying tenant for no tenant.
How Does the Larger Loan Change Coverage?
A cash-out makes the loan larger, so the same rent covers less. The coverage ratio is monthly rent divided by the monthly principal, interest, taxes, insurance, and any HOA dues. When you take more cash out, the denominator grows and the ratio falls. A smaller cash-out lifts it.
This is why the buyout amount deserves a place in your math. If you borrow extra only to fund the payout and turnover, a modest cash-out keeps the ratio healthier than a maximum one. The minimum DSCR on standard programs is 1.00, and stronger ratios open better pricing and leverage. A separate select-lender path takes coverage below 1.00 with leverage and terms adjusted.
Clearing 1.00 is not the same as positive cash flow. The calculation compares rent to the monthly housing obligation only. Repairs, vacancy, management, utilities, and capital expenses sit outside it. A thin ratio on a larger loan leaves little room for a vacant month, which matters when you have just removed the tenant.
Credit and reserves matter too. A 620 floor exists in parts of the network, most programs want around 660, and 700 or higher unlocks the strongest leverage tiers. Reserves commonly run about six months of the full monthly payment, stepping up to about nine months on loans above $1,500,000. Standard programs go up to $3,000,000, and above $2,500,000 the network generally holds to 30-year fixed structures. Every file is underwritten individually, so treat these as ranges.
What Belongs in the Buyout Agreement?
A weak agreement is the fastest way to turn a buyout into a dispute. Whatever the loan file needs, the written terms protect you first. A property-management guide from Shuk Rentals lists the core elements, and they match what a lender reviewing the file will want to see.
- Every adult on the lease signs. A single signature leaves the other tenant free to stay.
- A fixed move-out date and a stated condition. Define what “broom-clean” means for this unit.
- A full key inventory. List keys, fobs, garage openers, and mailbox keys.
- What happens if the tenant stays. The agreement should say the original lease and your remedies continue.
- Deposit handling. State how the deposit is treated, and make sure the numbers match the lease.
- Payment terms. State the amount, the method, and when it is paid.
On payment timing, the safer structure is to pay the balance when the keys are returned and the unit is inspected. Paying a large share at signing gives the tenant money and no reason to leave. If you offer a partial payment up front, keep it small.
Pay by cashier’s check or wire, not by handing over bills. Keep the signed agreement, the proof of payment, and the key-return receipt together. If the unit is leased again afterward, that paper trail also supports the file.
What About Business Purpose and the Use of Proceeds?
DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage.
The federal rule behind that treatment exempts credit extended primarily for a business or commercial purpose, as laid out in Regulation Z, section 1026.3. Paying a tenant so you can re-let, reposition, or renovate a rental is plausibly a business use of proceeds. Keep the buyout agreement and proof of payment with your loan file, and describe the purpose honestly when the lender asks.
Tax treatment can depend on how the funds are used and how the property is held; investors should keep clear records and speak with a qualified tax professional before relying on any deduction.
Where the Rule Breaks: Edge Cases
Most of the trouble sits in a handful of situations. Each one changes the rent the lender will count or the order you should follow.
- Month-to-month tenants. These are usually underwritten on market rent, with the lease as support. Notice rules, not a buyout, may be the simpler exit.
- Expired leases. The file needs a renewal or a market-rent basis.
- Related-party tenants. A tenant who is a relative or affiliate gets closer review.
- Partly vacant multi-unit buildings. Some lenders accept one or two vacant units on a refinance if those units are rent-ready.
- Subsidized tenancies. Notice and termination rules are program-specific. Confirm them before you assume a buyout is the right tool.
- Active arrears or a pending eviction. A file with unpaid rent or a court case runs into extra questions about the lease and deposits. Resolve the situation before you apply.
- Ineligible property types. Manufactured homes, log homes, and barndominiums are not offered through the network’s DSCR programs, so a buyout plan cannot rescue those files.
If the property is a short-term rental, the rules shift. The program typically expects a 640 or higher credit score and about 12 months of hosting history, with a 1.00 coverage floor, and cash-out on STR collateral capped around 70%. Short-term rental rules can vary by city, county, HOA, and property type, so investors should confirm local rules before relying on projected rental income.
DSCR vs. conventional financing
There are two common ways to finance an investment property, and they qualify you differently — here’s how investors weigh them.
Why investors choose it
- Qualifies on the property’s rental income — no personal tax returns, W-2s, or pay stubs needed to document income.
- No personal debt-to-income ceiling to clear, so existing mortgages and obligations don’t cap your borrowing the same way.
- Can be closed in an LLC, keeping the property inside a business entity.
- Built for scaling — not held to the limit on number of financed properties that conventional financing applies.
- Underwriting centers on the deal: generally qualifies when the rent covers the payment, a 1.00x coverage ratio being a common baseline (confirmed in underwriting).
- Designed specifically for investment property, including long-term and, where the program allows, short-term rentals.
Where it’s strong
- Often the lowest ongoing financing cost for a buyer who fully qualifies on personal income — a fit for a first property or a cost-first purchase.
Trade-offs for investors
- Requires full personal income documentation and must fit within a debt-to-income limit — salary, existing debts, and other mortgages all count.
- Typically held in your personal name rather than a business entity.
- Caps how many financed properties you can carry, which can become a ceiling as a portfolio grows.
- Evaluates you as a borrower as much as the property, which usually means more paperwork.
How investors usually choose: a first or single property often optimizes for the lowest financing cost; portfolio builders often optimize for leverage, vesting in an LLC, and scaling past conventional caps. The right answer depends on your goals, the property, and current guidelines — both paths run through select lenders in Lendmire’s wholesale network, with eligibility and terms confirmed in underwriting.
When Not to Do This
A cash-out funds a buyout well in some situations and badly in others. Skip it, or pause, in these cases:
- The property barely clears the ratio today. A larger loan on thin coverage leaves no margin, and a vacancy lowers it further.
- You are inside the seasoning window. Cash-out typically wants about six months of ownership from title recording.
- The unit is not rent-ready. A refinance on a unit that needs major work may stall at the appraisal.
- The tenant is likely to say no. If you cannot be sure the tenant leaves, do not refinance on the assumption that they will. Close on the lease as written.
- The buyout is a small expense. If the payout is modest and you have cash, borrowing for it may cost more in loan size than it saves.
For an investor with equity in a stronger-coverage property and a clear plan for the unit, the cash-out is a reasonable tool. For one whose ratio is already tight, the better move is often to wait, build equity, or raise the rent first.
What the Investor Decision Looks Like
Work backward from the end state. Decide whether you want the unit leased at market rent, vacant for renovation, or sold. That choice tells you which of the three paths fits.
Next, check the numbers on the new loan, not the old one. Estimate counted rent under each path, then size the cash-out to cover the buyout and turnover without pushing coverage below your comfort level. If a smaller cash-out gets you there, take the smaller one. Leave room for a vacant month, because the ratio ignores it.
Then line up the cash. If you need to pay the tenant before funding, know where that money comes from. If you plan to use proceeds after funding, make sure the tenant understands the move-out date is tied to your timeline, not to the lender’s.
Finally, build the file as you go. The signed agreement, proof of payment, key receipt, rent evidence, and any new lease belong together. Lenders review what is on paper.
Key Terms Defined
Cash for keys: A written, voluntary agreement in which a tenant leaves by a set date and returns the keys in exchange for a payment.
Counted rent: The rent a lender uses in the coverage calculation, usually the lower of the signed lease or the appraiser’s market rent.
Form 1007 and Form 1025: The appraisal rent schedules for single-family homes and two-to-four-unit properties.
Coverage ratio (DSCR): Monthly rent divided by the monthly principal, interest, taxes, insurance, and any HOA dues.
Seasoning: The ownership period a program expects before it will fund a cash-out, commonly about six months from title recording.
Rent-ready: A unit in rentable condition, with working systems and finishes a tenant could move into.
Frequently Asked Questions
Can I use DSCR cash-out proceeds to pay a tenant before the loan closes?
No. Proceeds are not available until the loan funds, so a buyout paid earlier has to come from cash on hand or another source. If the tenant needs to be paid first, line up that money in advance. If you can wait, close the cash-out with the tenant in place and pay the buyout from proceeds afterward.
Does a vacant rental qualify for a DSCR cash-out?
Often yes, though it depends on the program. A vacant property is not automatically ineligible because the appraiser’s market rent can stand in for a lease. Some programs prefer a leased property on a cash-out, and the unit still needs to be rent-ready. Check the program before you empty the unit.
Will a below-market lease hurt my coverage ratio?
Yes. The lender counts the lower of the signed lease or the appraiser’s market rent, so a low lease caps the ratio at the lease figure. Removing that tenant and re-leasing at market can lift counted rent, though market-rent opinions vary and the vacancy period is a real cost.
How much can I take out on a standard rental?
Most of the network tops out around 75% LTV on a cash-out for a standard rental, and around 70% on short-term-rental collateral. The cash you receive depends on the counted rent, the new payment, reserves, and the leverage cap, so it is not a fixed figure. A smaller cash-out leaves a stronger coverage ratio. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
Does a DSCR of 1.00 mean the property cash flows after the buyout?
No. A ratio at or above 1.00 means rent covers the monthly payment, nothing more. Repairs, vacancy, management, utilities, and capital expenses sit outside the calculation, so leave a margin, especially right after a turnover.
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. Program terms are subject to lender guidelines and individual underwriting, and nothing here is a commitment to lend.
For how equity extraction works on an investment property, see Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
A DSCR-focused mortgage broker, Lendmire (NMLS# 2371349) places investor financing across 41 markets — 40 states plus Washington, D.C. — with DSCR eligibility generally reviewed by the lender on property cash flow instead of tax returns, subject to lender guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in 2025 and 2026.
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References
1. BiggerPockets — Cash for Keys
2. Shuk Rentals — Cash for Keys Agreement Guide for Landlords
3. CFPB — Regulation Z, 12 CFR 1026.3
This article is part of Lendmire’s investment property cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Get a DSCR Cash-Out Refinance When a Conservator Manages the Rental · How to Pay for a Parent’s Nursing Home With a DSCR Cash-Out Refinance · Should You Do a DSCR Cash-Out Refinance to Fund an Adoption?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.