Cash out refi to buy other property

[Anand Acharya]

I am currently owning a rental property that is generating positive cash flow. It has enough equity that I can cash out if I refinance. However, with current interest rates, I will be paying much more in interest and it will turn into negative cash flow. My plan is to pay down for  a duplex or quadplex with the equity that I can take out with refi. Then I am not sure if the overall ordeal will create some positive cash flow or not. 
I would appreciate if someone can help me out run numbers and figure out what would be the best course going forward in terms of creating some cash flow as well as create value out of the situation.

[Brenden Mitchum]

Hey @Anand Acharya, welcome to the BP community!

Very clever to look at the total return, rather than separate them by property. However, maybe a bit too clever? Personally, I would never want a property that is losing money, even if it helps me purchase something that cash flows. This property will always be a liability unless I am able to raise rents enough to cash flow. Maybe this is an option for you? Are you below market now? Are there some low cost updates you could do to justify a rent increase? Maybe you could decrease the equity you pull out, which would lower your payment so that you can still cash flow? This is what I would look into first. The alternatives, in my mind, are to sell or hold but definitely not refi into the red. 

Let's say you do this assuming your total return will be net positive over current. What if you have a hard time finding that cash-flowing duplex or quad? At what point is it a bad total return vs. a good one? Rates will likely continue to climb for a while so this could make it tough to cash flow on the new property (assuming you're leveraging that equity you pulled out of the other). Just things to keep in mind if you decide to analyze based on total return. 

Hope this helps a bit. Please, feel free to reach out anytime if you have other questions or just want to chat!