Other areas nearby that are great include, Cardiff, Encinitas and Del Mar. 

I have also utilized owner financing for longer periods of time, including personal residence and 2 barrier island houses on the coast of Florida.  

Determine the most likely sales price of the build (factor in the cost of the land also) and include all selling costs to arrive at your net profit and ROI. 

I've talked to lots of California and a few NYC investors that have lost money (including myself) who bought inexpensive properties in the Midwest mostly and a few in the South (Class C is volatile). - some strategies I've seen California investors use to lessen negative cash flow: house hacking, mid-term rentals (people temporarily displaced from home renovation or insurance reasons like fire), rent by the room, Short Term Rentals. - The ultimate house hack, live in the small ADU unit and rent out the two levels of the main house on AirBnb in San Francisco (I would have thought STRs are oversaturated in S.F. but it worked for them and they stay fully booked).

Sounds like a good plan, should have plenty of options available.I would be cognizant of any group you talk with on two areas, the location of the property including any potential concerns of it being 'rural', as well as the minimum purchase price and/or minimum loan amounts.

Once the tenant applies for the unit, you'll have to work with the tenant and Section 8 to get approval, which always includes an inspection of the unit.

. - Your portfolio will suffer:(You want a PMC that has great systems in place, including a great portal where you can keep tabs on eveything.You will also need to manage your PMC on a regular basis.

There are kinds of guru's who will help you buy section 8 properties in a turnkey package including the rehab the property will need to get it rented.

The overall LTV (including all 3 mortgages) will be key and your selling point will need to be that the 2nd mortgage ($8k) will burn off in 2.5 years (based on your surprise that it was even out there, I'd recommend that you follow up in 2.5 years and ensure that it's been satisified, so that it doesn't surprise you again in the future).Does the $8k grant vest over the 5 years? 

This should include potential rental income, expenses (including property taxes, insurance, maintenance, and potential vacancy), and your expected return on investment.