This  would allow me to pay down an additional $40,000 of debt, leaving more funds from the cash out refi for rehabbing a non-income-producing garden unit in another building that I have sitting there.

Positive high wage job growth and population increases?

Hard money lenders are not going to take second position to provide a down payment on another loan. 

Additionally, I added a new boiler, installed air conditioning mini splits, and refinished the original hardwood flooring throughout the house.

The one thing that would be an unrepairable negative for me is something that you actually mentioned as a positive: the K-5 school across the street.

My question is should I sell and take the equity and buy potentially 2 or 3 additional townhomes?

At the 2023 spring job fair, there were over 20,000 open positions.

I agree with everything @Devin De Lange said and would add one additional factor to consider.

I had a good paying position with a EV company that allowed me to build a good amount of reserves for investing.

I can definitely tell you there's still a lot of positive cash flowing and 1% rule deals and you get amazing appreciation.