Rental, turn negative cash flow positive with 401k loan?

[Steve K.]

Hi.

I have a 1950s SFH property purchased back in 2005 for $178k. Zip code 98310. Population growth, total about 5% during the last 10 years. It has a detached two car garage. Decent sized land. Unfinished full height basement. Basement accessible from outside stairs. Its price went up a little bit during real estate bubble years. In 2009, I refinanced the property from 5.6% to 4.9% interest rate. I moved to another city due to job and rented the property out because I did not want to sell at a loss. Cash flow wise, it costs me $120 a month. Which I can handle OK. Now it's 2014. I am guessing it's worth $140k. I owe $125k with 25 years to go on the mortgage. Not able to refinance to lower interest rate because LTV is 75% with traditional lender.

Since it's about 2 hours drive away. Property management company is taking care of the property. Property management fee is 10%.

I would like to explore some options with this property:
1. Sell at a loss and become cash flow neutral?
2. Borrow from my own 401k retirement account and pay down the principle. The 401k loan will need to be paid back during the next 15 years at 2.4% interest. The 401k loan interest goes back to my own account. Basically I am my own bank. Doing this would turn negative cash flow to positive cash flow of $90 per month. Is this a good option? Or is this good money chasing after bad money?
3. Borrow from 401k retirement account and acquire another cash flow positive property to cover the original cash flow negative property?
4. Finish the basement and then rent or sell?

What would you do in this situation?

Do you consider paying down mortgage and gaining equity as part of the total ROI? How does one calculate that?