The Quick Read: A DSCR cash-out refinance turns equity in a rental you own into cash, and you can spend that cash on a franchise fee, build-out, equipment, and working capital, because the lender underwrites the rental and not the franchise. The loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines. Your franchise’s projected earnings never enter the calculation, and the rental stays pledged as collateral after the money leaves.
- Cash-out on a standard investment rental tops out at 75% LTV (loan-to-value, the loan as a share of the property’s value). Short-term-rental collateral caps at 70%.
- Lenders typically want about 6 months of ownership, a credit score of roughly 660 or better (a 620 floor exists in parts of the network), and about 6 months of reserves.
- The rent must cover the new, larger payment. A bigger loan thins your coverage cushion.
- Net cash is smaller than the headline number, because the old loan payoff, closing costs, and any prepayment charge come out first.
- If you plan to pair this with an SBA loan, confirm with that lender first whether borrowed money counts toward your required equity.
Key Terms Defined
DSCR (debt service coverage ratio): The property’s rent used for lender review divided by its monthly housing obligation. A result of 1.00 means rent equals the payment.
PITIA: Principal, interest, taxes, insurance, and any association dues. It is the full monthly obligation on the property.
Cash-out refinance: A new, larger loan on a property you own. It pays off the old loan, and you keep the difference as cash.
Seasoning: The waiting period a lender wants between buying a property and refinancing it. For cash-out, that is typically about 6 months from title recording.
Reserves: Liquid money you hold after closing, usually measured in months of PITIA.
Equity injection: The share of a business purchase that you pay from your own funds rather than borrowed ones. SBA loans require one.
FDD (franchise disclosure document): The long document a franchisor must give you before you sign. It holds the fee tables and other details.
DSCR Cash-Out Calculator
Run the cash-out numbers in your market
Rate source: Freddie Mac 30-yr average via FRED® — Federal Reserve Bank of St. Louis · effective Oct 15, 2026
Prefilled with starting assumptions — enter your property’s value, balance, taxes, and insurance for a more accurate picture.
Program parameters update from Lendmire’s centralized guideline source. Taxes and insurance are editable estimates.
As of Oct 15, 2026 · General Freddie Mac market benchmark, not a Lendmire loan offer. Property value, balance, taxes, and insurance are editable estimates. Maximum loan-to-value varies by lender, program, property type, and seasoning. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
How Does a DSCR Cash-Out Actually Fund a Franchise?
It works in two separate steps. First, you pull cash from a rental. Second, you spend that cash on the franchise. The lender never finances the franchise directly.
That separation matters. A franchise buyer often has no business income to show yet. A DSCR loan sidesteps that problem because the file qualifies primarily on property-level rental income covering the payment, subject to lender guidelines. The lender looks at the rent, the property, your credit, your equity, and your reserves.
The franchise’s economics play no role. A strong brand will not rescue a weak rental, and a weak brand will not sink a strong one at underwriting. The franchise only shows up as the stated use of the money.
Lendmire arranges these loans as a broker through select lenders in its wholesale network. The brokerage does not underwrite or approve them. Lenders do that, file by file.
The Step-by-Step Sequence
Step 1: Price the franchise first. Every franchisor’s disclosure document carries a table of estimated initial investment, called Item 7 in the federal franchise disclosure rule. It lists the franchise fee, build-out, equipment, opening inventory, and working capital. Plan around the high end of each range, not the low end, and add a cushion for slow early months.
Step 2: Check your equity against the 75% ceiling. On a cash-out of a standard investment rental, the new loan cannot exceed 75% of value. Subtract what you owe today. What remains is the most you could draw before costs.
Step 3: Test the coverage. The new loan is bigger, so the payment rises. Rent has to cover the new payment at the level the program wants. Many select programs start at 1.00. A separate select-lender path goes below 1.00, with leverage and terms adjusted. Stronger ratios open better pricing and leverage.
Step 4: Confirm seasoning and reserves. About 6 months of ownership is the common expectation for cash-out. Reserves are commonly about 6 months of PITIA, and about 9 months on loans above $1,500,000.
Step 5: Sign the business-purpose statement and open a dedicated account. More on that below.
Step 6: Time the refinance to the franchise deal. Federal rules require the franchisor to hand you the disclosure document at least 14 days before you sign or pay anything, per the FTC’s consumer guide to buying a franchise. That is a rule about the franchise sale, not about your loan. The practical point is to have cash available when the deposit and fee come due. Do not sign a franchise agreement on the assumption that a refinance will fund in time.
Step 7: Deploy the cash and keep receipts. The franchise agreement, invoices, and bank records should tell one clean story from the loan proceeds to the vendors.
What Does the Cash Really Look Like? A Modeled Example
Here is a worked example with percentages only, so nothing gets mistaken for a quote. These inputs are modeled assumptions, not market data.
- Rental value: 100 (an index, not dollars).
- Maximum new loan on a cash-out at 75% LTV: 75.
- Existing loan balance: 50.
- Gross room before costs: 75 minus 50, or 25 points of value. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Now subtract what comes off the top. Closing costs come out of those 25 points. So does any prepayment charge on the old loan. Reserves, which the lender wants to see after closing, may also have to come from the proceeds if you hold no other liquid cash. The check you can actually spend is smaller than 25 points.
Next, compare that to the franchise budget. If the high end of Item 7 equals 35 points of this rental’s value, the cash-out leaves a gap of at least 10 points before costs. You would need savings or another source to close it. Run this subtraction before you fall in love with a brand, not after.
Now look at coverage. Say the rent covered the old payment at about 1.6x. The loan balance in this model grows by half, from 50 to 75. Taxes and insurance do not rise with the loan, so coverage does not fall by a full third. It still can slide to the low 1.1s. A file at that level may still work. A file that starts at 1.15x may land near or below 1.00. Below 1.00 is available through select lenders in the network, with leverage and terms adjusted, but the cash you can draw usually shrinks.
One more point, because it trips up beginners. Clearing 1.00 does not mean the rental produces positive cash flow. DSCR compares rent to PITIA only. Repairs, vacancy, management, utilities, and capital expenses sit outside the calculation. While the franchise ramps up, you will carry that new payment out of the rent, with a cushion that the math above does not capture.
What Do Lenders Check Before They Release the Cash?
Four gates decide how much cash comes out and whether the file clears. Across the wholesale network Lendmire places files with, the pattern is consistent.
- Leverage: 75% LTV is the ceiling on cash-out for standard rentals. A short-term rental caps at 70% on cash-out, and those files expect a score of 640 or better and about 12 months of hosting history.
- Coverage: Rent against the new PITIA. Stronger ratios earn better terms.
- Credit: A 620 floor exists in parts of the network. Most programs want around 660. A score of 700 or higher unlocks the strongest leverage tiers.
- Reserves and seasoning: About 6 months of PITIA and about 6 months of ownership are the common expectations. Conservative files vary by lender and loan size.
Loan sizes run up to $3,000,000 on standard programs. Above $2,500,000, the network generally holds to 30-year fixed structures. Extended terms and interest-only periods are available through select lenders for investors who want them.
Some properties are simply not offered. Manufactured homes, log homes, and barndominiums fall outside these programs. If your equity sits in one of those, a DSCR cash-out is not your path.
Qualification is always subject to lender guidelines, credit approval, and property review.
Business Purpose: What You Sign and What You Document
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.
A franchise purchase is a clean business use of the money. It is a commercial acquisition that you will operate. The trouble starts with mixed use. If part of the cash is meant for a personal expense, such as a vacation or a car, say so up front. A file with a muddled purpose is the one that creates problems later, and it is the borrower who carries them.
Practical habits keep your paper trail tidy:
- Open a dedicated account and deposit the proceeds there.
- Pay the franchise fee, contractors, and equipment vendors from that account.
- Keep the franchise agreement and invoices with the statements.
- Hold your own personal spending out of it.
Two Different Coverage Ratios (Do Not Mix Them Up)
Franchise buyers run into the word coverage twice, and the two uses have nothing to do with each other.
The rental’s DSCR is rent divided by PITIA. It decides your DSCR cash-out. A franchise lender, if you use one, may look at the franchise’s own projected cash flow against its debt. That is a business test built on projections.
Your franchise’s projected income does not help the rental qualify. And a strong rental coverage ratio does not prove the franchise will work. Keep them separate in your head, and in the conversations with each lender.
Item 19 of the disclosure document is where a franchisor puts any earnings claims it chooses to make, per the federal franchise rule. If the document has none, you have no earnings numbers to project from. Do not assume they exist.
Using DSCR Cash-Out With an SBA Loan
Many franchise buyers use an SBA 7(a) loan for the bulk of the purchase. The pinch point is the equity injection, and that is where a DSCR cash-out can come in.
Current SBA procedures call for a minimum 10% equity injection of total project costs on startups and complete changes of ownership, according to Starfield & Smith, a law firm that summarizes the rules. Total project costs include the purchase price, financed working capital, closing costs, and fees. A cash-out can supply that injection, which makes the combination attractive.
The catch is that SBA lenders differ on whether borrowed money counts. Some want the buyer’s equity to be liquid cash that was not financed. Others look at the source of the funds and the borrower’s ability to repay the debt. Treat this as a question to settle before you close the refinance, not after.
Also expect a source-of-funds review. SBA lenders typically want account statements showing the money was available and where it came from. That is another reason for the dedicated account.
For a related example of a business-use cash-out, see Lendmire’s piece on whether a homeowner can fund a practice purchase with a jumbo cash-out (Can a Homeowner Fund a Practice Purchase With a Jumbo Cash-Out?). The structure differs, but the sequencing questions are similar.
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.
How Does It Compare to Other Ways to Fund a Franchise?
Different funding sources underwrite different things. That is the most useful way to compare them.
| Source | What gets underwritten | Collateral at risk | Best fit |
|---|---|---|---|
| DSCR cash-out | The rental’s rent and equity | The rental | Large lump sum, LLC title |
| SBA 7(a) loan | The franchise and the buyer | Business and personal assets | The bulk of the purchase |
| Personal savings | Nothing | Nothing pledged | Smaller budgets, the equity injection |
| Seller or franchisor financing | The deal terms | Varies by deal | Bridging a modest gap |
Many buyers stack two or three of these. A DSCR cash-out as the equity injection, an SBA loan for the balance, and savings for working capital is a common shape. The sources at the franchise end vary by brand, so ask the franchisor what it will and will not finance.
Where the General Rule Breaks
An SBA lender rejects borrowed equity. If your lender insists on unfinanced cash, the cash-out cannot serve as your injection. You may still use it for working capital or equipment outside the injection, but confirm that in writing.
The rental sits in an LLC. An LLC borrower can work, subject to lender program eligibility. But moving a rental into an LLC before you refinance can raise issues with the existing mortgage, so check with the current lender first. Keep in mind that an LLC does not by itself make a loan business purpose. The use of the proceeds still matters.
The rental is your primary residence. DSCR loans are for non-owner-occupied investment property. A home you live in is not eligible.
The rental is a short-term rental. Cash-out tops out at 70% on short-term-rental collateral, and the file needs about 12 months of hosting history. Short-term rental rules can vary by city, county, HOA, and property type, so confirm local rules before relying on projected rental income.
You bought the rental recently. Cash-out typically waits about 6 months from title recording. A rental you bought last month cannot fund a deal that closes next month.
The franchise is very large. The federal disclosure rule exempts franchises with a very large required initial investment from some disclosure duties. That threshold is inflation-adjusted and changes over time, so check the current figure if your target brand sits in that range.
Risks, and Who Should Skip This
The biggest risk is concentration. The cash comes out of a rental that stays pledged. If the franchise struggles, the loan payment still comes due, and the rental is what the lender can pursue.
The FTC’s consumer guide puts the question plainly: ask yourself how much money you can afford to lose. Treat that as a real filter. Franchise ownership comes with no guarantee of success, and the early months are when a new business is least able to service debt.
Skip this route if any of these apply:
- Your rent barely covers the current payment, so a larger loan would push you under the program’s coverage floor.
- You have little equity once the 75% ceiling is applied.
- You hold no reserves outside the cash you would draw.
- The franchise’s unit economics look weak, or the disclosure document gives you no earnings data to test.
- You cannot carry the larger payment from rent alone if the franchise earns nothing for a while.
A final test helps. If the franchise earned nothing for a year, could you carry the rental’s new payment from rent and your own savings? If the answer is no, shrink the draw or wait.
A Short Decision Checklist
Answer these in order. Each no is a reason to pause.
1. Does the rental have at least about 6 months of ownership and a title in your name or your entity’s? 2. After the 75% LTV ceiling (70% for a short-term rental), is there enough equity to matter? 3. Does the rent cover the new, larger payment at the coverage level your program wants? 4. Do you hold the reserves, commonly about 6 months of PITIA? 5. Is the whole purpose of the cash a business use you can document? 6. Have you asked the SBA lender or franchisor how they treat borrowed funds?
If all six are yes, the structure is worth pricing. For deals that grow into a bigger portfolio, Lendmire also covers whether a portfolio cash-out can fund a partner buyout or a purchase (Can a Portfolio Cash-Out Refinance Fund a Partner Buyout or a Purchase?). The complete DSCR loans guide walks through the basics of how these programs work.
Frequently Asked Questions
Can I use rental equity to buy a franchise?
Yes, subject to lender guidelines. A DSCR cash-out returns the equity as cash, and you may spend it on a franchise as a business use. The loan is reviewed on the rental, not on the franchise.
Do I need franchise income to qualify?
No. The file qualifies primarily on property-level rental income covering the payment, so a brand-new franchise with no track record is not an obstacle. Your credit, reserves, and equity still matter.
Can the cash cover the franchise fee itself?
Generally yes, because it is business use. The cash is yours once it is disbursed. Many buyers use it for the fee, build-out, equipment, and working capital. Keep the paper trail clean, and disclose any personal use up front.
Will a DSCR cash-out replace an SBA loan?
It can, but often it pairs with one. The cash-out can supply the equity injection while the SBA loan covers the rest.
What if my rental is held in an LLC?
It can still work, subject to program terms. Check the existing mortgage before moving title, and expect the lender to review the entity documents.
How much cash will I actually receive?
Less than the headline equity. The old loan payoff, closing costs, reserves, and any prepayment charge come out first, and the 75% ceiling caps the new loan. Your result depends on rent used for lender review, the new payment, and the lender’s review.
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. The brokerage arranges DSCR investor loans through select lenders in a 41-market network that spans 40 states plus Washington, D.C. Request a quote or call 828-256-2183.
Investors weighing their equity options can start with Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
Lendmire is a non-QM mortgage brokerage (NMLS# 2371349) arranging DSCR investor loans in 41 markets, including Washington, D.C., through wholesale and investor-lending channels. DSCR loans are evaluated by the lender on rental income rather than personal income, subject to lender guidelines — a fit for LLC-owned portfolios, self-employed investors, and operators scaling beyond conventional loan caps. Recognized as a Scotsman Guide Top Mortgage Workplace in 2025 and 2026.
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References
1. 16 CFR § 436.5, Franchise Disclosure Rule
2. Starfield & Smith, Equity Injection Requirements Under SBA SOP 50 10 8
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: Should an Investor Close a Cash-Out Refinance That Appraises Low? · How to Recoup Cash on an All-Cash Purchase After a Low DSCR Appraisal · How to Make a DSCR Cash-Out Cover Your Hard Money Note and Rehab Cards
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.