If this was 2010 and the market is recovering from the crash I would say keep it. 

@Marc Winter, thank you for advice, you are right of course about not being able to recover rent lost to vacancy.

Assuming you are getting cash out, since you stated as such in your first paragraph, I think this is a no brainer...once you look at 2 numbers:1 - Added cost out of pocket (higher closing costs) for lower payments = $21,0002 - Added cash out with lower payment option = $3,0003 - Total added cost (cash out of pocket) for lower pmt option = $18,000      Note:  This is money you have to recover before you are making any profit...so the added cash flow isn't a plus until this money is recovered.4 - Monthly savings (added cash flow) = $1655 - Number of months to added cost recovery = 109...or 9+ years. 

If things go south you may not recover.

They are RE investors that tap the banking system for financing.Here's what I've read in terms of landlord responsibility:In NY the residential landlord has no duty to mitigate its damages and may recover the full value of remaining payments owed under the lease for the entire lease term even if the landlord makes no attempt whatsoever to offset, minimize, or cover its losses.Looking for some advise. 

So basically, repossess the unit and forfeit this month's and last month's rent, or wait for him to turn up with the hope that maybe I'll be able to recover the rent.I'm definitely leaning toward the former - but what are your thoughts?

In 2014 after a work accident I sold about 20 of them I owned locally to recover and enjoy my family.

This civil penalty may be recovered in any action brought under this part by the enforcing authority; or the enforcing authority may terminate any investigation or action upon agreement by the person, firm, corporation, association, or entity, or the agent or employee of the foregoing, to pay a stipulated civil penalty.

What you pay for a house involves two parts,,,cash and leverage.The cash you pay must be recovered (through cash flow) before you start to make a profit.The leveraged part impacts your cash flow through the monthly payments on that leveraged amount.

I think he's still waiting on the economy there to recover before he tries it, though.