cash out refinance investment metrics

[Kyle Peterson]

I'm trying to figure out how to assess debt service costs when using a cash-out refinance to purchase a new investment property.

I own one investment property and am looking to use the equity in that property to purchase a second property. Essentially would have no cash outflow and would essentially finance 100% of the purchase of the new property (partially through a new mortgage on the new property and partially with the refinace on the existing property). I'm trying to understand exaclty how to assess the new property.

I have tried looking at it a few ways and wanted to know what people thought was the most accurate way of looking at it.

1) View the new property as 100% financed. This essentially shows no cash outflow for the purchase and shows very low income each month. I don't think this is accurate since I am using existing equity to make the purchase (I.E. I had already paid for that equity) and this equity would otherwise be unused.

2) Consider the cash out refinance to be the down-payment on the new property. This makes the income and other metrics look more like a solid investment, however this ignores the debt service costs on the refinance payment.

3) Assess both properties as one. I started to look at it this way and realized that it really didn't make any sense at all.

Like I said, I own one property so this would be my first ever cash out refinance (I realize that financing like this is not easy to get these days - but I will look into that after I make a decision to go forward or not), so was hoping I could get some more experienced insight. The way I am leaning towards is to look at it in a combination: look at number 1 and determine that it is both cash flow and net income positive, and therefore since the equity would otherwise be doing nothing that this is the good use of the equity (a positive vs. a zero), then to assess if the second property is a good decision based on number 2, and make the decision the same way I would make any purchase decision.

Would love to get some insight. Thanks.