I've always recommended the same solution when it comes to this kind of scenario and I have to recommend the same thing here again.
But this answer always depends on what you're looking to do.
Do you want to be a buy and hold real estate investor? If yes, then you have two options. If no, then you have one option - put the 30k and get out of that house.
If yes, you want to start building a portfolio, then here are the two logical options in my mind and why I always choose the ladder.
1) Pay the 30k to get out of the house. Now you own nothing. You are saving the 200/mo or so in cash flow though. But you are getting none of the long term values of holding real estate.
2) Take the 30k and buy another rental that makes at least 200 or 250/mo in net cash flow. One that you are getting a true investor discount on (i.e. 150k houses that you are all in at 105k to 110k).
Choosing this option, here is what you would have.
1) 2 houses worth 120k and 150k = 270k, that you owe 250k or so on (so plus 20k in equity)
2) Net income of roughly $50 a month or so. (600/yr)
3) Principal paydown of 300/mo or so. This is also going straight to your net worth. (3600/yr)
4) Appreciation. The assumption is that appreciation should return to normal and historically you can figure 2 to 3% if not more (historically, homes double every 20 years in the non coastal areas). But even at 2% appreciation, your appreciation would be 2% times 270k or 5,400/yr.
When you add that all up, thats 9,600/yr you're getting from your 30k investment. Thats a much better return in my mind than a savings of $200/mo.
And here's the other thing. Buy and hold is really about leveraging time as much as anything else. You may only be making $50/a month from these two properties but, over time, rents will go up and your mortgages will stay the same. That rental income is going to grow. Your appreciation will grow as well. In 10 years, those houses may be worth 360k total. 2% of that would be 7,200/yr instead of 5,400/yr. Rental income may be 400/mo total between the two (4,800/hr). And principal paydown (which also goes up every year) may be 400/mo in 10 years (4,800/yr).
So now you're looking 15k a year return on your 30k investment.
And don't forget the tax benefits. If you're at break even on the cash flow, then you're going to have about 6k a year in depreciation from the two houses so you'll show about a 5k loss that you'll get to offset against your personal income.
If you're in the 25% tax bracket, that would be another 1,250 a year bump in your tax refund.
So thats why, for me, the choice is always the same. Keep the house and use the money to add another property that you buy right and the numbers cash flow right.
I actually have a buddy that I met on BP and he had the same question 3 years ago. Most of the people told him to sell and eat the price. Instead he held on to the house and bought another rental. The house shot up in value so that it is no longer underwater. But he's getting 400 or 500 in principal paydown (he has a 15 yr mortg on it). Still doesn't cash flow though. But he did buy another rental and he's making 700/mo on that one.
Between the two houses, he's making 700 or 800/mo and getting another 500 or 600 in principal paydown. Plus the appreciation on both. How will that look in 10 years? in 20 when they're both paid off?
Doesn't that sound better than having used that money to sell the house and eat the loss?
Again, I understand it would depend on whether you want to be an investor at all first and foremost. If you don't want to have rentals, then this would not be a good fit. But if you do, then I will always believe that keeping the house is the better way to go.
The one exception I would say is if you have a house that is significantly in the red on the cash flow (i.e losing 300 or 400/mo) and you could get out of it by selling and only having to eat 10 or 15k or something. Thats where the formula tends to change a bit. The more the losses and the less the out of pocket to dump it, the more it might make sense to sell it.
But in the numbers I'm seeing in your case, your cash flow is not really that bad and your out of pocket is a bit too high.
