If you intend to pay off the loan sooner then the commercial is the loan to choose as you will be pushed to pay more principal down faster.  

Here are a few numbers on the house:Purchase Price: $301,000Remaining Loan Balance:  $285,000Improvements: $30,000Improved Home Value: $340,000Rental Income: ~$2,700/month for both unitsP&I: $1390/month ($450 principal, $940 interest)Taxes: $340/monthInsurance: $310/monthRepairs and Maintenance: $135/monthCapEx:  $135/monthPMI: $205/monthProjected Appreciation: 1-2% per yearYou'll notice I have not included the cost of a property manager in the numbers above as this would put me in the red every month.  

Still, the main question is whether or not $500 per month to principal + $200 per month rent with low/no cash flow is better than the refi for cash and the lower payment option? 

We are currently in the market as a brokerage and also buying investments as Principals.

Then we add Depreciation and principal pay off part of mortgage.

It will also leave it up to you to pay principal down, as your monthly payment is usually minimum interest only.

A freeway may be ok for young professionals but may be a draw back to the elderly and or families.  

Are there any drawbacks?

@Patrick SearsSpeak to your accountant but depending on your overall business you will leave the expenses and the principal on the balance sheet and pay taxes on the interest earnedYou don’t write off renovation etc. you also don’t deduct the depreciation typicallyBut I am not an accountant just telling you how my accountant does it but my situation could be very different

This will protect your father-in-law by knowing the principal is required to be paid down and ensure you don't lose out to variable interest rates.