(This well could be a generational thing and whatever the comfort level of the guest is.)

If the property was misrepresented in the sale documents, there could be grounds for legal recourse, though this might be more challenging after the rehab.In a similar situation, I’ve seen investors focus on maximizing their returns by operating within the legal limits (e.g., as a single-family or duplex) while still exploring long-term solutions with the city.

Communicate with your tenant on tasks you are uncertain about and confirm if there are comfortable living with fixes you completed or if they would like a professional.

Are you comfortable with roommates?

And the locals in Highlands have been fiercely debating STR's and regulations for the last few years, so I wouldn't be comfortable buying there.

The home has 6 bedrooms and comfortably sleeps 16.

Consider looking into FHA or conventional loans with lower down payments to maximize your cash.

I saw a lot of advice to do what feels comfortable but I feel like I want to find out which one will end with more net worth.

Are you looking for steady, low-risk passive income now, or are you comfortable taking on more leverage to scale faster?

The question is mostly a personal financial planning question and it depends on your preference and what balance of risk and access you'd like and would be comfortable with.