Cash-Out Refinance of Investment Property - does this make sense?

[Takahito Torimoto]

TL;DR: A cash-out refinance will make my original property negative cash flow of $250, but my use of that cash (either in the "holding" investment or the eventual STR property to put a down payment on) should more than cover for the shortfall.

I am considering doing a cash-out refinance on one of my rental properties - so that I have cash ready for my next property.

• Market Value: 320k
• Remaining principal: 96k
• Current Monthly Cash Flow: $300

(I have not raised the rent enough to current Market rate which would make it cash flow $600; I plan on replacing the tenant next summer to get market rate)

If I were to do a cash-out refinance today (max of $144k), my P&I will go from $560 (3.75%) to about $1100 (3.5 - 4%) giving me about $250 negative cash flow (Market rent would give me a positive cash flow of $50/month)

Would it still make sense, if I am able to put that $144k immediately into a "holding" investment with 7%+ CoC returns (approx $800-900/month cash flow) until I can use it for a STR property with higher returns?

My other option is to sell the property and do a 1031 but I'm trying to learn/understand the benefits of cash-out refinancing for scaling up the number of properties.

My understanding is: a cash-out refinance can (and in my case, will) lower the cash flow on the 1st property if the interest rate is not significantly lower, but if using that cash to purchase a 2nd property where the TOTAL cash flow between the 2 properties is greater, then it makes sense. Am I correct?

(I am also thinking of eventually getting a HELOC on my primary residence, but my understanding is that it's a terrible way to use as a down-payment since the interest is high, unless it can be paid off quickly like in a BRRRR)