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.

The square footage of the 2nd home on the property appears on the parcel info as an "extra feature" but it does not appear as part of the "heated area."

What I do with extra cash....... well like Elvis says, Viva Las Vegas!

If it wasn't a rental, the owner might have been a moron who didn't file for the exemption and paid extra in taxes every year.