If you are in Southern California, rentals often do not make sense from the perspective of cash flow. The second option will make you cash flow neutral to slightly negative over a long holding period, based on the 50 percent rule and your estimate of current market rent. If rents double, the cash flow might be decent, but your ROI might not be so good.
You might want to think about what the house is worth vs the market rent. It's not unusual to see the rent per month be 0.5 percent of market value per month. Using the 50 percent rule, you would net 0.25 percent per month or 3 percent per year. Not a great return on a risky asset that requires management. Any interest rate over 3 percent in this scenario means your leverage is negative, and your return on equity will be less than 3 percent.
Each time I refinance a property, I assume it's the last time and the numbers have to make sense. If the interest rates go down, I am pleasantly surprised. They can go up, and have in the past.