Buying first property - use cash or mortgage?

I have found my first rental property, buying from a family member that needs to leave their home asap.  I intend to do a cash-out refi on my current home (which I will continue to live in), and am looking into one of two options;

1. Get enough cash from the refi for down payment, closing, and rehab. This requires an up-front loan on the rental property.  

2. Get enough cash from the refi to fully pay for the house purchase through to rehab. - I can comfortably afford the new note payment.

I feel option 2 is better as it would allow me to get a cash-out loan on the new property when I am ready to buy my second rental home, which I think I can pull off relatively quickly, ideally within 3-4 months.  However, I am unaware of the tax implications of this - if one scenario is preferred to another.  

Please share your thoughts!