Help with a RE "sell or keep" issue

[Marcus I.]

Need help in making a critical decision. This is a little lengthy of an issue for me, but I’ll try to keep it short while still giving you the proper details.

I currently own a home in AZ that I am renting out and have tenants in but I live in VA with a roommate. Stats on the AZ home:

Remaining mortgage balance: $203K

Current market value: $280K-$300K

Monthly Cash flow: $400.00

My personal financials:

Current savings account balance: 10K

Thinking about pulling my 401K balance of $20K to better leverage it on real estate.

Total potential cash: $25K-$30K plus the possible $60K-$70K from the AZ home sale.

If I sell the AZ home before the end of the year I may stand to make (after closing costs, realtor fees, etc) around $60K-$70K tax-free since I will be taking advantage of the 5-year capital gains exemption rule (Owner occupied for at least 2 out of the last 5 years).

I want to purchase another owner-occupied home in VA for a future rental property as well but I am having trouble deciding whether I should sell the home in AZ and wisely use the proceeds (not spending the whole amount but putting a portion down and using some to fix it up, while also leaving a reserve to possibly purchase another home).

Right now I kind of want to keep the AZ home for the decent monthly cash flow and yearly tax benefits, but I would also like to use it to sell and possibly leverage more moves closer to me and be able to move back out on my own to owner occupy a VA loan and make some moves with that with a much larger pool of cash to work with comfortably. HELP?!