It sounds like you've decided to take a loss here, and that's the hardest part sometimes. The question is how much of a loss are you going to take? If you are loosing every month, do the math. If the average house sits on the market for 180 days in your area and you are loosing $1000 per month, try to price the house down and take the hit upfront. In a declining market, you may come out ahead by getting out of the game more quickly. If the current market can get you 190, sell for 185 (under this type of logic) and advertise it as below market.
You really need to get tenants, though. It's hard to sell a multifamily that has vacancies. You cannot justify the ask without the cash flow. Consider taking whatever you can get for rent (income, not quality of tenant). It's better to take in $500 per month in a $700 market than to leave the house empty.
There's even more to all of this. The explanations will come lengthy and plentiful. If you'd like to talk, you can contact me through my website. I have experience with multis, as I've had a few of my own.
First I would recommend calling your lender and ask them what your options are. Can you refinance it at a lower rate? Can you make interest only payments for a while until you have it re-rented?
How did you arrive at the current value? Was it appraised? Did you have an agent do a CMA? Investment property isn't typically impacted as much by the market as single family properties. The value is more a function of what the investment can support. So talk to an agent and find out what a realistic selling price might be for it's current condition.
If you would like to contact me, I would be happy to help you with that. I have also worked with other sellers that are in short sale situations, so if that turns out to be the cse for you, I can assist with that process as well.
Short sale vs. forclosure. Both have their issues and consequences. Short sale may not be an option for you (bank's choice not yours) due to your entire financial situation. A bank will look at your entire picture to see if you have other options. Since you have other assets, your house, they may not accept a short sale. Only they can decide that.
The bottom line is don't wait. The earlier in the process you take action, the more options you will have.
Lots of luck -- you're not alone.
It sounds like you want to and need to sell and therefore, a short sale may be your only option if the property is worth less than what you owe.
Was the bank even willing to do a short sale? And to answer your question about your credit - it depends. Your situation is a little more complicated because if you sold the rental for $190,000, you would be able to pay off your 1st mortgage but also have the HELOC on your primary residence.
I strongly urge you to contact a Realtor who can guide you to a person who is a short sale specialist. There are several things you would need to do and between your Realtor and the short sale specialist, they can best guide you.
I understand you don't want to deal with the property any more but perhaps using a Realtor or property management company in the short term would be able to ease the financial burdens you're facing by getting the other unit rented ASAP. You can still work to get it sold but in the meanwhile, you have tenants.