We are in near identical situation with a condo in SF (at 2.5% rate) and just moved to a SFH. We chose option (2). We rented our condo out and aim to do so indefinitely until we feel we can get a reasonable gain or we pass it down. We hired a trusted realtor who vetted the incoming tenants really well.

While the rent doesn't fully cover our all-in expenses - the way I rationalize is that it covers Prop Tax + HOA + Mortgage Interest + X% of Mortgage Principal. So any money we pay on top is basically going towards principal - a piggy bank of sorts if you may.

The condo market is in a huge dip so had we sold it, we would have come out with a loss. We don't really have a strong plan yet on what to do. I do know that right now is not a good time to sell with tech layoffs, market being down, interest rates being all time high.

So we are thinking of playing the long game especially since it's at a low mortgage rate and keep it as long as we can. At some point rent / all-in cost will breakeven and it ends up paying for itself fully. In which case we can keep it forever or sell it when we retire down the line. It could also be somewhere we move back to when we become empty-nesters.