I'm actually in the EXACT same situation you're in. But we have credit card debt, a HELOC, and two car loans as well as they just resigned the lease (good tenants) so I'm mulling over the decision for a year before really deciding. Well, and I have a fixed rate mortgage and the value of my property is still above the mortgage.
We lose about $300/mo on ours... that is if you don't count the HELOC which in all fairness isn't really the mortgage in my eyes, its a credit card attached to the mortgage. I could also get rid of the property manager which would cut that loss down to $150 but I'm not 100% as to how I would proceed with that.
I've gone over the situation in my head forwards and backwards about keeping or selling. If I sell next year, I can probably have a 8-15K loss at the end of the closing with realtor fees in mind as well. But on the other, my tenants are actually the ones paying a big chunk of my mortgage... we were like you and bought the house in '05 and moved in '07 after our neighborhood was tagged by gangs... and we found out we were having another child.
Long term, the house could be a great investment. But it probably won't turn a profit till 2011... and I'm not in dire straights over it. I'm more concerned with my CC, HELOC, Student loan, and car debts... if I got rid of those I could more than comfortably keep both homes... the one we live in and the one we rent out. Have them paid off in 15 years and use that to supplement my retirement in addition to my Roth IRA.
I could be making a really bad mistake by keeping it. I am losing money every year on it... but I'm trying to find myself at a decision I won't second guess in years time. That and I have a year to mull it over. I don't want to make a decision out of fear... the original plan was to buy it and live in it then eventually rent it out & when its paid off is when I'd be generating income on it. We just moved out of it a few years earlier than I anticipated.
I don't really have any advice... just sort of wanted to let you know you're not alone and good luck in your decision. I guess just sit down and really think about your goals... was it in your plan to begin with to one day be a landlord? If you'd feel better selling in the long run, perhaps that is the best decision. Mine on the other was to be a landlord at some point, so I don't know what I'll do... I have a year to think about it though.
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