Last month, I walked out of a closing with a check for $167,307—completely tax-free. No, I didn’t sell any properties. I didn’t flip anything. I leveraged a strategy that most investors overlook: strategic refinancing of cash-flowing rental properties. After six years of building our real estate portfolio, my partner and I unlocked large amounts of capital without selling any properties. Here’s how we did it.
The $170K Strategy That Changed Everything
Here’s what most real estate agents won’t tell you about Louisville’s current market: while everyone’s focused on appreciation (Louisville home values increased 8.3% year-over-year in Q4 2024), the real opportunity lies in combining cash flow with strategic refinancing. We proved this with three properties that generated $167,307 in tax-free cash—money we can now reinvest to scale our portfolio.
Our Portfolio Foundation: Why Location and Strategy Matter
My partner and I have acquired six properties over six years, focusing on Louisville’s lower-income areas where cap rates are highest. These aren’t glamorous Highlands properties—they’re working-class neighborhoods where the 1% rule works consistently. We chose these areas because lower purchase prices mean less equity tied up after 20% down payments, while higher rent-to-purchase ratios ensure immediate positive cash flow.
Most investors miss out on the Section 8 advantage. Louisville’s Section 8 payment standards range from $976 for studios to $1,955 for 4-bedroom units, and tenants stay 6- 7 times longer than self-paying tenants. That stability is important when you’re scaling a portfolio, providing guaranteed monthly payments and annual HUD inspections that ensure property maintenance standards.
The Three Properties That Generated $167,307
Let me break down exactly how we extracted nearly $170,000 in tax-free cash from three properties while keeping all the rental income. This wasn’t some complex strategy—just strategic timing and understanding market fundamentals.
Property 1: The Value-Add Champion
We purchased this property in July 2022 for $50,500 with a tenant already in place, which I always prefer because it means immediate cash flow. When the tenant moved out, we invested $30,000 in strategic improvements between tenancies. The monthly rent of $1,300 exceeds the 1% rule on our total investment, and the improvements forced significant appreciation. When we had it appraised, it came in at $139,000, allowing us to refinance at 75% loan-to-value for $104,250 and extract $34,750.00 in cash.
Property 2: The Cash Flow King
Sometimes the best deals are the ones that need the least work. We purchased this property for $65,000 in July 2022 with an existing tenant and required minimal investment beyond basic maintenance items. The property consistently generated $1,250 in monthly rent, and even without major improvements, market appreciation brought the appraised value to $136,000. We refinanced for $102,000 at 75% LTV, extracting $34,000 in cash while maintaining the positive cash flow.
Property 3: The Package Deal Winner
This property was part of a $140,000 package deal of 4 properties we purchased in June 2020, so a $35,000 equivalent, demonstrating how package acquisitions can offer incredible opportunities to take on multiple properties at once and at a discount. The property rents for $1,200 monthly, though we pay the $120 monthly water bill, which still leaves excellent cash flow. Despite being our oldest acquisition, appreciation brought the appraised value to $107,000, enabling us to refinance for $80,250 and take out $26,750 in cash.
The Numbers That Matter
When we totaled everything up, the three properties had a combined appraised value of $382,000 against our total all-in investment of $180,500. The 75% refinance loans totaled $286,500, and after paying off existing mortgages and closing costs—which ran about $20,000 for the three DSCR loans—we walked away with $167,307 in tax-free cash. Each partner received $83,654, with the remainder staying in our operating account as reserves for future opportunities and maintenance needs.
Why Strategic Refinancing Beats Traditional Approaches
The Tax-Free Advantage
Here’s what makes this strategy so powerful: refinance proceeds aren’t taxable income. Unlike selling properties and paying capital gains taxes, which can reach over 50% when combining federal, state, and local taxes, as well as depreciation recapture, cash-out refinancing lets you access your equity without triggering any tax liability. When you sell a property within one year, you face ordinary income tax rates up to 37%, plus state and local taxes, plus a potential 15.3% self-employment tax. With refinancing, your tax rate on the extracted cash is zero.
The Reality of Refinancing Costs
Investment property refinancing isn’t cheap, and it’s important to factor these costs into your calculations. Our DSCR loans cost approximately $20,000 total in closing costs for all three properties. DSCR loan closing costs typically range from 2% to 6% of the loan amount. They can include origination fees (0.5% to 1% of the loan amount), appraisal fees (a whopping $700 each), title insurance ($500 to $1,500), and various administrative costs. Although commercial loans may have lower closing costs in some cases, DSCR loans offered us the flexibility to qualify based on property income rather than personal income.
The national average for refinance closing costs is approximately 0.72% of the loan amount, though investment properties typically see higher costs than primary residences. Despite these upfront expenses, the long-term benefits of accessing tax-free capital and maintaining cash-flowing properties make the strategy worthwhile.
The Compound Growth Opportunity
That $83,654 each partner received isn’t sitting in a bank account. It’s working for us behind the scenes. Invested at 9% annually, it becomes $128,701 in five years—a growth of $45,047 per partner. But you can also use this money to buy additional cash-flowing properties, creating a compound effect that traditional stock market investing struggles to match when you factor in leverage and tax advantages.
How This Fits Into the FIRE Movement Strategy
Real estate offers several advantages over pure stock investing for FIRE (Financial Independence, Retire Early) goals. The ability to use leverage means your cash-on-cash returns can significantly exceed stock market returns. When you buy a $100,000 rental property with 20% down and achieve positive cash flow, your returns on the actual cash invested can reach 15-25% annually when you factor in appreciation, tax benefits, and debt paydown. Stock market investors rarely achieve sustained returns at those levels without taking on significant additional risk.
The tax advantages are substantial, too. Real estate investors benefit from depreciation deductions, mortgage interest deductions, and the ability to defer capital gains through 1031 exchanges. Meanwhile, stock investors face annual taxes on dividends and capital gains distributions, plus ordinary income taxes when they start withdrawing during retirement.
Scaling This Strategy Without Complex Methods
Our Approach: Steady Growth Over Fancy Strategies
We’re not using trendy methods like BRRRR (Buy, Rehab, Rent, Refinance, Repeat) in our partnership. Our strategy is more straightforward: buy cash-flowing properties in solid neighborhoods, maintain them well, and periodically refinance to extract equity for additional purchases. This approach requires less active management than constantly rehabbing properties, and it reduces the risk associated with construction timelines and cost overruns that can derail more aggressive strategies.
The 1% rule serves as our baseline for every acquisition. This rule states that the monthly rent should equal at least 1% of the purchase price. If a $130,000 property can’t generate $1,300 in monthly rent, we move on to the next opportunity. This simple filter ensures positive cash flow from day one and protects against market downturns that could make marginal deals unprofitable.
The Section 8 Stability Factor
Section 8 tenants provide a level of income stability that’s difficult to find elsewhere in real estate investing. The housing authority pays the approved voucher amount directly to landlords, typically covering 70% or more of the rent, with tenants responsible for the remainder. Annual rent increases are built into the program, providing some inflation protection, and the guaranteed payments eliminate much of the collection risk associated with traditional rentals.
The annual HUD inspections help maintain property standards and identify maintenance needs before they become major problems. Most importantly, Section 8 tenants tend to stay much longer than market-rate tenants, reducing turnover costs and vacancy periods that can significantly impact returns.
Louisville Market Advantages for Long-Term Growth
Louisville’s rental market offers compelling fundamentals for long-term real estate investors. Cap rates for multi-unit rental housing range from 8.35% to 10.35%, significantly higher than many major metropolitan areas. Rent growth is already above the national benchmark and projected to rise further in 2025, reaching 2.5% by year-end. The median home price of $290,000 keeps purchase prices reasonable compared to other markets.
Cash Flow vs. Appreciation Strategy
My focus isn’t entirely on cash flow, though it’s certainly important for covering ongoing expenses and building reserves for future repairs. My primary goal is to maintain properties with minimal ongoing expenses, generate modest positive cash flow, and benefit from appreciation that enables this strategy. This approach provides more investment options than focusing purely on monthly cash flow, since it allows for strategic moves like equity extraction.
The 1% rule ensures baseline profitability, but I’m not chasing the highest possible cash flow if it means compromising on property quality or neighborhood stability. Properties that barely meet the 1% rule in solid areas CAN provide better long-term returns than properties with higher cash flow multiples in declining neighborhoods, especially when factoring in appreciation and refinancing opportunities.
Your Path to Replicating This Strategy
The Refinancing Timeline
Most lenders require at least six months of ownership before allowing cash-out refinancing, though twelve months is more common for investment properties. This waiting period allows you to establish rental history and complete planned improvements that will boost the property’s appraised value. Use this time to document all income and expenses, as lenders will scrutinize cash flow.
When you’re ready to refinance, shop multiple lenders to compare terms and closing costs. DSCR lenders, commercial banks, and portfolio lenders all have different criteria and pricing structures. The lowest interest rate isn’t always the best deal when you factor in closing costs and loan terms, so calculate the total cost over your expected holding period.
Building Long-Term Wealth
The beauty of this approach is that it creates multiple wealth-building mechanisms simultaneously. You’re receiving monthly cash flow from rent, building equity through mortgage paydown, benefiting from property appreciation, and gaining tax advantages through depreciation and mortgage interest deductions. When you periodically refinance to extract equity, you’re essentially resetting the process with additional properties while maintaining all the existing benefits.
The Compound Effect of Strategic Real Estate Investing
Our $167,307 extraction represents just the beginning of a wealth-building strategy that compounds over time. While stock market investors in the FIRE movement typically need 15-25 years to build sufficient assets for early retirement, real estate investors can reach financial independence much faster. The key difference is that real estate allows you to control larger asset values with relatively small amounts of actual cash investment.
When you combine the monthly cash flow from six properties with the equity extraction capability we just demonstrated, you’re creating multiple income streams that don’t depend on market timing or withdrawal rates. The properties continue generating rent regardless of stock market volatility, and the underlying real estate typically appreciates over long time periods even if there are short-term fluctuations.
__________________
The strategy that generated our $167,307 tax-free check isn’t complicated. It just requires patience, discipline, and understanding of local market dynamics. The 1% rule serves as your profit protection baseline—never compromise on this fundamental standard, regardless of how attractive a property might seem otherwise. Section 8 acceptance provides income stability that’s difficult to guarantee with traditional rentals, especially in uncertain economic times.
Focus on cash flow and appreciation equally, but independent of each other. Louisville’s market fundamentals support both approaches, with reasonable purchase prices that enable immediate cash flow and steady appreciation that creates equity extraction opportunities every few years. Build adequate reserves for market fluctuations and unexpected opportunities, because real estate success comes from being prepared to make a move.
Ready to discuss your specific situation and explore Louisville’s best investment opportunities? Let’s schedule a call to discuss your goals and identify properties that can deliver both immediate cash flow and long-term refinancing potential, similar to the ones that generated our $167,307 windfall.
Jonathan Klunk is a licensed real estate agent in Louisville, KY, with EXP Realty, as of this writing. This content is for informational purposes only and should not be considered legal or financial advice. Always consult a qualified real estate, legal, or financial professional before making decisions.
