As a local agent in the area, I unfortunately see this situation frequently. For example, a family that put down $190,000 on a home 4 years ago, and are barely able to sell it now in order to pay the costs and pay off the mortgage, but little-to-no proceeds. They had considered the same thing--possibly renting it out and hoping for a good market recovery in the near term future without a disastrous landlord experience.
I just completed a post that addresses the question of how long it will take to reach peak real estate values for the Modesto area from 2005-2006 and the reasons why. Short version answer: after 2039. The full article can be found at
Even if it doesn't take quite that long, the point is that is wwaaaaaaaay far out in the future.
With that in mind, let me address the rental information. An ideal rental is a smaller home with a low rent that isn't in excellent shape to begin with. That way it doesn't deteriorate much, and it is affordable to many prospective tenants. The larger and nicer the home, the less your ROI/rate of return as a rental. For example, $1200/mo rent may get you a nice 3/2 with 1500 sq ft in the 95355 zip code. However, a home such as the one you've described may only get $1700-$1800/mo. More difficult is that many well qualified people in that price range are using that monthly budget to buy instead of rent. Even if you got $2000/mo for it and had ideal tenants, would that cover all costs of ownership including taxes, insurance, landscape and pool maintenance, as well as cover you through periods of vacancy and possible property management expense?
And you answered your own question about that mortgage payment staying on your debt obligations and hindering you from purchasing where you're moving to.
While you could rent out the property, I agree it would be a highly risky proposition in light of the outlook for real estate values, and it may not even be enough to cover your costs of ownership and get in the way of buying. AND it's a huge hassle.
Depending on your equity position, if you are able to sell the home and get out, even with nothing, that may be the best overall solution long term. Even if the market value isn't high enough for a full payoff on your loan, a short sale is still very feasible (and if you wouldn't get any money out anyway, it would theoretically make no difference). Clearly this is not pleasant news, but it may be a choice between bad and worse. Getting out at all still makes you more fortunate than most homeowners in our area. For the folks I mentioned at the beginning, that is their situation. The good news is they will have this monkey off their back and be able to start fresh in their new location. Cutting your losses is probably the best thing to do, and knowing what I do, it's what I would do in your situation.
It just so happens I know a really good agent that can help you.... :-)
Please contact me. I can get you the highest net proceeds in the quickest amount of time so you can make the best of a tough situation and move on.
The Lewis Team at Prudential California Realty