Interesting Situation with First BRRRR

[Shane Parmenter]

My wife and I purchased a home for $75,000 two months ago.  We put $10,000 into a renovation and the appraisal is now $115,000 giving us $25,000 invested (with down payment) and the ability to refinance out $32,000 in equity with a local bank.  So we will have $0 down invested in this project and potentially take a few extra bucks out right away.  Here is the kicker.  Our local government is doing flood protection work near the river and has bought out homes that will be affected by the construction.  As part of the program, the city set aside $17,000 per affected family for short term housing.  One of the families whose home was purchased by the city, has a lease with us for 16 month rental and the city is writing us a $17,000 check up front for the rent!  Seems like the perfect storm :)

My question is, which option would be best:

1) Should we still Refinance the $32,000 out of this deal and keep the $17,000 check and just make mortgage payments as we go from the bank account ($500/mo mortgage payment)? 

2) Should we not refinance at all, keep the $17,000 cash, and open a $32,000 line of credit against the home just to remain liquid ($350/mo mortgage plus Line of Credit)?

3) Refinance the home, but ADD the $17,000 to the mortgage giving us a $235/mo Mortgage payment and open a $49,000 line of credit?

PS- We are already looking for BRRRR #2 so being liquid is important to us.

Thank you in advance!