Buying my next property: save vs pay down current mortgage faster

[Boris Suchkov]

I'm currently house hacking (a duplex, with a tenant in the back unit and me and my family in the front unit) and looking to save the rental income towards my next down payment. I'd like to buy my next house to live in in five years. 

I'm looking at two scenarios: (1) save and invest the rental income for five years, or (2) pay down my current mortgage faster to later do a cash-out refinance to get that lump sum for the down payment.

In either scenario I intend to keep my current home (rent out both front and back units after I move).

If I save the rental income, my time horizon is too short to expect the typical 5-7% stock market return as it would be too risky to invest this money in stocks. I'd likely go with a high-yield savings account or bonds, which will be in the 2-3% return range. 

If I funnel the cashflow into my mortgage to pay down the principal, I will be reducing how much interest I pay on the mortgage over time (assume the mortgage interest is 4%), but I'm having trouble understanding if this is directly comparable (e.g. 4% mortgage interest vs 2-3% if I invest the money in bonds) since I'm not paying off the whole mortgage in those five years. Interest will continue to accrue on a smaller principal amount beyond the five years.

If I go with paying down the mortgage option and do a cash out refi, I will have to pay closing costs, which also complicates the equation. On the other hand, the property may appreciate in those five years, giving me "free" equity beyond simply what I paid into it. I assume any new mortgage can be covered by the rental income of both units, given the high and stable rents in our area.

Any advice would be greatly appreciated!