Have you considered the added cost for this restriction?

Not once in the last 16 years. check out the stats for San Diego.By the way I believe you can succeed in both markets (high cash flow/low appreciation & low cash flow/high appreciation) but best odds are if you are intimate with the market.  

2@Mary Chen, @Seo Hui Han I think your issues are going to be more with the lending than any 1031 restrictions. 

The number of bedrooms for STR has to match the number of bedrooms cited in the septic permit, so you are seeing homes with 7 BR now have a 10 person STR occupancy limit and some homes that had bedrooms added without permits now being restricted. 

A lot of cities in the OC don't allow STRs and the ones that do may restrict them in the near future.

HI Michael, I'm a huge fan of all things Colorado but I've heard STR restrictions have been tightening..AirDNA and local PM would be a good projection and analysis resource.

Purchase price: $49,000 Cash invested: $3,000 We purchased 5 acres with no deed restrictions or HOA and continue to build out rentals/lots on the property.

I would shop around, maybe the LO you're dealing with is inexperienced and is mis communicating or they may just have odd lending practices?  

which i think is odd. 

Investors/lenders can have overlays that are more restrictive, but generally can't waive this.