Breaking even & don't want to sell; options to improve cash flow?

[Takahito Torimoto]

I currently have a rental property that is, on average, giving me zero cash flow (up until my recent rent increase, I was paying about $100-200 out of pocket per month).

Before I get beat up on that... I got divorced 4 years ago, decided to keep the house (because it was under water), and decided to rent it out because 1. it was too big for me, 2. it was too far from work, and 3. it was emotionally difficult for me to live there. I figured I could wait it out until the market improved (and it has!).

My tenant in it since 4 years ago has never had a late payment. She's a single mother with 5 kids, trying to make it on her own. Ideally, I'd love to sell it to her (and save the real estate commissions for agents), but she is still trying to fix her credit (from her bankruptcy in her previous marriage and existing student loans) to be able to get a mortgage. I can't get myself to kick her out and sell the house under her - but I also am really wanting to get some positive cash flow out of it.

Numbers: House is currently worth about $280k with $135k left in principal. I had refinanced it to 20 years at 2.67% just 4.5 years ago - so the 20-year refinance is obviously cutting into my cash flow.

I currently have my primary residence in a townhouse I bought 4 years ago - worth about $180k with $110k left in principal on a 30 year mortgage at 3.75%.

What are my (smart) options to still keep the house, and create positive cash flow? Refinance?  Tap into the equity I have in my townhouse (equity loan)?  Or - assuming I can't get myself to kick out a single mother of 5 who pays every month - is my best option keeping it until she's ready to buy and just make sure I am at least breaking even?

On a not-exactly-related note, what are the pros/cons of using equity in my townhouse as a down payment to purchase another home (rental or primary residence), versus saving up for the cash? Hopefully in a year, I'm hoping to rent my townhome (I can definitely get positive cash flow) and buy a primary residence.

Thoughts, opinions, and suggestions are welcome - thank you!