Is there any benefit for letting the tenant reside there until we have a contract OR would you initiate termination ASAP to mitigate any potential marketing/sale conflicts with the tenant/tenant's family?

Even if you end up taking your focus to different areas of real estate, you can't beat the benefits of what house hacking has to offer.  

No one party is really benefiting to a greater degree to cause a conflict of interest.  

The benefit here is that, while you're paying interest on that loan, you're paying it to yourself and the fees for 401k loans are typically very low ($100-$200 depending on the plan and vendor)

It turns out getting your license helps and is required for retail sales of real estate—go figure—but it does not provide much of a benefit for investing.I then spent hours upon hours on websites like BiggerPockets absorbing all the information I could about investing in real estate.

It is true that every step taken in life is, for the most part, a calculated risk, and we all want to come out ahead while using our wit to benefit ourselves and our families.

Factor in tax benefits.  

Now the numbers don't work.I went back to the drawing board and decided I would benefit more if I used the majority of the funds on the cottage and add a bedroom addition, while keeping the caterer in place and collecting higher rent.

One of the tax benefits of a rental is the noncash depreciation deduction that serves to shelter cash flow from tax.

A benefit of a 1-year lease is that you know you won't have a vacancy for a year.