Now should I dump it to the principal payment of the house to reduce amount owed  and do a cash out refi ?

Decide whether your principal will be returned slowly in monthly payments or in a balloon payment due on a certain date. 

He has written up a contract for me to look over and it yields me a 20% cash return on the principal in 12 mo. with a personal guarantee on the loan and the interest if not paid in full at the 12 month mark.

To be a successful investment property, the rents must cover the principal, interest, insurance and property tax, plus a little left over for upkeep.

The trustee will usually be instructed to bid in on behalf of the lien holder the total of amount of the principal, interest owed, late fees and legal fees, as well as any other legitimate fees incurred by the lender.Should a bid be received by a third party in excess of this amount, the third party would win the bid and get a trustee deed evidencing ownership after paying the trustee with certified funds.

With lower interest (4%) and higher income (reduce vacancy to no more than 5%), you'll find that this is a very profitable property.Plus you're not accounting for the principal payments which will add another $15,000 or more.

They are:RELOCATION - A Borrower may be eligible to obtain another FHA-insured Mortgage without being required to sell an existing Property covered by an FHA-insured Mortgage if the Borrower is:  relocating or has relocated for an employment-related reason; and  establishing or has established a new Principal Residence in an area more than 100 miles from the Borrower’s current Principal Residence.INCREASE IN FAMILY SIZE - A Borrower may be eligible for another house with an FHA-insured Mortgage if the Borrower provides satisfactory evidence that: the Borrower has had an increase in legal dependents and the Property now fails to meet family needs; and the Loan-to-Value (LTV) ratio on the current Principal Residence is equal to or less than 75% or is paid down to that amount, based on the outstanding Mortgage balance and a current residential appraisal. 

The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

Principal (not principle) paydown generally is a sign you're de-levering investments that are sub-optimal save the leverage. 

$ (100.00) Principal Balance $ 157,000.00 Investment $ 70,000.00 Equity $ 103,000.00 Over Paying PMT $ (727.09) Management Fee $ - Net $ 494.58 Yearly Net Income $ 5,934.90 Taxes Month $ (204.33) Yearly Net Operating Income $ 3,482.95 Vacancy Rate 8.33% NOI with Vacancy $ 3,192.71 Cash on Cash (Are you getting a good ROI) great is 15% 4.98% 1% Rule (Is it a good investment generally?)