I want to pull out 40k in order to invest in a new rental property.

Based on the extra $275/month - I'm looking at about a 12.5% ROI but even if we don't command that and pull off $750/month, we're still looking at over 10% and more importantly a better quality tenant situation. 

How much should we pull out if we refinance our 1st mortgage?

I'm struggling to find anything worth looking at twice but on a side note I'm currently only browsing and won't be pulling the trigger till around December.

If we were to refinance the rental to pull out the equity, could we:1. put the equity in a self directed IRA? 

I would make an appointment with the state or county health sanitarian and go over this before I pulled the trigger.. 

So no swinging hammers, pulling permits in your own name, etc. 

As I see it, your two best options are to refinance the property to pull out a significant portion of the equity and invest it elsewhere (but eventually pay capital gains when you sell the property), or to sell the property now and reinvest elsewhere.

Sara,Here's a few answers to your questions.  1.Insurance - Pull up the potential property on Realtor.com. 

For myself in MA I did a cash-out refi with Salem Five bank in 2016 and it was easy and they had very good rates.You'll need to work with the bank to go through the process, it's basically the same as getting a mortgage so you'll need to provide the usual litany of documents like recent pay stub, current mortgage docs, bank accounts, they will pull your credit report, etc.