Increasing the deductible 5x only reduces the premium that little? 

This is the amount you'll be making payments on during the financing term.Interest only means the monthly payment you'll make will only include interest, not any principal paydown that would go toward reducing that initial loan balance.

I would like to reduce the term of my tenant’s lease.

Personally I'd keep rents around $1,150 to reduce turnover. 

This historically has produced an outstanding return as evidenced by your equity accumulated with only 5% down. prop 13: you are paying a reduced prop tax rate. 

If you have an obvious duplex on the front, the ADU would not be permitted in any case.  2 units max.The height max on the ADU should be 24', but you do have bulk plane to contend with - and to your point, NO upper story decks are allowed on an ADU anywhere (back yard privacy thing). 

., and people working from home instead of the office, you can imagine how much they save in reduced accidents

If you feel that the property will reduce your expenses, help you build equity, and fits the criteria of what you want in a home I would go with the offer.

My experience there is that it significantly reduces the applicant pool.

Quick summary - I have a multi-family property in which I invested with another partner. We're both 50/50 and not in an LLC. I am being bought out and will eventually be off the mortgage. I currently still have all of...