For extra eye grabbing attention and a homey feel I might add a small cement bird bath outside one of the front windows behind the Japanese yew bush.

If you want to be extra safe, buy umbrella insurance and it will provide even more protection for very little cost.

On that big of a rehab, paying a couple of thousand $$ extra but having the money might work better for you.Now you dont have to be out of pocket and waiting for the next draw.

We could use that money to make extra payments on our primary residence to pay it off way sooner. 

If they really don't have a hardship and are just taking advantage of the situation they may also be avoiding extra scrutiny with the assistance forms.  

I am leaning towards option 2, with the idea that I can put the extra cash into the stock market or even consider out-of-state investing for cash flow.

I try to put extra toward that.  

However, if you're doing something like a STR, then maybe 15% down makes more sense and you could use that extra cash you saved on the DP to help furnish your property.  

Or, if an heir does decide to  probate the home, then Lonell's use of the property grants him no extra legal interest, he has merely contributed to securing it, preserving it, and to creating some income (rent) for the estate.  

Often water is tied to the homeowner, things like electricity is with the occupant.You don't want to include utilities in the rent as the tenants typically don't think/care about usage resulting in high water bills as they aren't paying for extras.