Should I use Hyper-V for a Basic Windows Server 2016 File Server?

Yes, you should virtualize even considering the overhead. There is no point of running bare-metal server installations nowadays (the only exception is legacy operating systems).

Reconsider using RAID5 on 3TB hard drives, there is a chance you won't survive another long rebuild. Today, RAID5 can be used only with SSDs where it still makes much sense.

Do not use DFS-R. It's inability to replicate open files and awful switch-over logic (DFS-R doesn't know which server has the latest consistent data) can lead to very bad results, especially, in virtualized environments.

Use Storage Replica or StarWind vSAN Free for replication.

Here's an example of using Storage Replica for deploying HA File Server in Stretched Cluster configuration: https://docs.microsoft.com/en-us/windows-server/storage/storage-replica/stretch-cluster-replication-using-shared-storage

And here's an example of how to build active-active HA File Server with StarWind vSAN: https://www.starwindsoftware.com/technical_papers/Microsoft-Hyper-V-2012-R2-Dedicated-SAN-scenario-Basic-2-node-Setup.pdf

Hope it helps.

1) Virtualize everything. There's no point in running anything bare metal (OK, there are some very niche cases, but your one isn't one of them for sure).

2) You can use Hyper-V as a file server but make sure you have it properly licensed, just using free Hyper-V will require you to at least buy CALs. I'd talk to your Microsoft sales rep with EULA in hands.

Actually, you could create Free SMB3 File Server on Hyper-V 2016. 2016 Server has been specifically developed and created only for virtual machines. According to Microsoft EULA, it is not recommended to repeat the steps below, because this process is a violation of the license agreement. The reason why we can create SMB File Share on Hyper-V 2016 is simple: all Windows servers require SMB 1/2/3 to work, and Hyper-V 2016 is not an exception. But it does not mean you should create any unsupported Microsoft services on GUI-less Hyper-V 2016.

Source: https://www.starwindsoftware.com/blog/free-smb3-file-server-on-hyper-v-2016