What would you do?

Here’s the situation.
I owe $272K on the 1st mortgage on my investment property (non-owner occupied).
I have a 2nd of $80K on my primary residence.
The investment property appraises for $320K. I cannot re-finance because it doesn’t make sense based on my payments and not having 80% LTV.
Rents (when fully rented – which is not often) are $2900/per month. Loans are $2800/per month. Expenses are about $400. My vacancy rate is high due to the area its in.

Option 1: continue to lose money and hope for the best. Costing me about $12K per year between vacancy and expenses.
Option 2: Cut my losses. Get someone to assume the $272 mortgage or buy the property and then pay for the $80K on my own ($500/per month).
Option 3: Put title into an LLC and then stop making mortgage payments. Don’t really know if this would work and sounds risky to me.

What would you do?

If the investment property has a good chance of appreciation over the next few years, I would try to stick it out. It makes me nervous when you say that your occupancy is low due to the area it is in. If the area is “dying” you may have to make a move. If you are in the path of progress, you may be OK.
In an effort to keep the property I would focus my attention on doing whatever I could to get your occupancy up to 100% even if it means reducing your rents. Losing $5K or $6K per year is far easier to absorb, especially if you think that your appreciation of the coming years will be greater than this loss.
You may want to consider adding appeal to the units to increase tenancy. I don’t know enough about the location or property, but I would spend some time thinking about what would make the units the best you can. Kitchens and baths can be a good place to look.

Lastly, you may want to consider breaking the building into condos. Then either sell a few, sell 'em all, or keep them. If you sold one or two, you could offer paper on them and use the down payments to offset your condo costs and the interest on the loans to pay your note. It’s a great way to offer a lease option.

I don’t think you could do any type of Real Estate Contract/paper without triggering the (likely) Due On Sale clause in the current first mortgage but a Lease Option (Schark mentioned) would work if the units were legally divided first (you can’t promise to sell something that is not technically available). Of course then you would have to do an aporpriate refi anyway with a partial release arrangement as each unit is sold. Maybe the Lease Option would work if you knew for sure you could get the Condo subdividing done prior to the end of the Purchase Option term. It sounds risky though - I would do the subdividing first to avoid any legalities.

If you did go Condo you would also have to form an Owners Association and address a few maintenence and repair issues. Be careful with this, it can get messy sometimes as I know people who have done it and had problems.

As far as the LLC goes - it wouldn’t work!!! As a Managing Member of the LLC you are responsible for managing it correctly. Doing what you proposed would, without a doubt, POP the liability protection bubble of the LLC and put it all on you personally!!!

Bottom line - I agree with Schark. Try to “stick it out”, make them more appealling, try different advertising techniques to get them rented, raise the rent a little but offer a month’s rent free … or whatever works for the circumstances.

One other thing I hesitate to even say is (IF the market trend is going to rise in that area) you could crank the numbers and do one of those partial interest only loans (2 to 5% monthly with the balance of the actual APR tacked on the back) for two or three years. This would give you a positive cash flow but would increase the principle over time. The idea being that market appreciation would match or exceed the rise in principle on the loan and you would then sell it when times are better. VERY RISKY THOUGH!