I had a buy to let in Leeds but ended up flipping it to release a gain, so I can use it for other developments I have on, that's the long term plan - however in commercial property.
It all comes down to what you want out of it and your risk perception.
Personally, option 1 all day long, save for the next deposit using the cashflow and savings etc. You just need to think of the negative balance as good debt - as it's there because you are making money for having that debt!
Look to buy somewhere that needs work, add value to it and pull out the additional equity - with the ultimate goal being leaving no cash in the deal.
There's so much you can do with property though.