Keep rental property or short sell? (interest rate, 401k, heloc, credit rating)

[fconeiv]

I live in Phoenix AZ, I have a 3bd/2b house I've been renting for about a year, it was my primary residence but I purchased another house and I originally intended to sell it, but market plummeted, decided to rent it to cover the mortage payment.

I typically have to get about $600 a month from my pocket to pay the mortgage, all the expenses and depreciation gives me about $2.5K of tax benefit. I figured I'm putting in about $5K a year. The not yet tangible benefit is that the mortage is going down every year about $3K.

I bought the house for $270K, current market value is about $170K. I currently owe $214K with WF. I also owe $32K on a HELOC with Chase.

I did a what-if scenario in an Excel spreadsheet, and if the house prices increase at a rate of 3-5% it will take about 6-7 years to be back at the price we bought it.

Fact is that I've been living pay check to pay check, I haven't been able to reduce the HELOC, and it seems I will need to pay about $30K before I can sell to breakeven with my two debtors (~$200K 1st morgage + $32K HELOC + $30K from my pocket). This would only benefit the debtors, as it seems I would loose my equity ($270K - $214).

I just feel it's a huge effort just to save credit rating. I have 3 daugthers and first one going to college next year, and then one more every two years for next 4 years. I addition, my wife may be having a surgery next year.

My current tenant is interested in the house, I've called WF to see if I have to be late to be considered for short sell, first response from the lady was that it was necessary, then she ask me to wait and returned to say it was not needed. She also mentioned I may qualify for refinancing to a lower interest rate.

I guess I'd like to short sell and negotiate the HELOC with Chase but somehow have both banks report my debt as "Paid in full". Seems like a lot to ask for.

Can someone check my numbers? Is my rationale correct? I'm already taking measures, like selling my unpaid car, re-financed my current house, and many other things. Although last month I had to stop my 401K contributions, and that really got my looking at this deeper. Also concern on the credit hit if short sale and how this may affect our ability to get student loans.

Thanks!