Is the function of the drain hose to let out water that collects in the airbox?
Yes it is!
I unplugged the drain hose and a shit load of gas pours out. What the hell could this be?
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It is not uncommon for some fluid to come out of that thing. I have not seen gas in mine but I do get a mix of water and oil - about a teaspoon or so. The fact that you have a lot of gas in there means that you have a sticking float or perhaps a float that is set way to high. Gas is backing up in the carb and pushing back through the air filter and into the air box. You need to pull your carbs and check/clean/check adjustment of your floats. While your in there give your carbs a through cleaning (jets, needles, everything). Make sure your needles are all set on the same clip and that your diaphams are not pinched. Also, make you you have the little o-rings on top. Get a bandit manual and get after it. It ain't hard to do this! Heck, bring it over to the house and we will get it done!
When I park the bike should I set it to "RES" or leave it on the "ON" position?
It doesn't matter. When set in either of these positions, gas it drawn into the engine by vacume when the engine is running. Set it to prime and it will be free flowing, period. There is no off position but you could splice in a on-off valve on your fuel line. Not sure why you would need to do that, if everything else was working the way it was suppose to.