I would lean towards recommending that you pursue the deal - plus having the property remain in your family may be a net positive for you and your extended family regardless of the ultimate financial return. 

Whether it remains an ESA or not, the Landlord has to treat it like they would any service animal.

In other words, STRs can remain and can be sold to other investors in the future3.

It’s generally better to pay taxes, especially if it’s preferential LTCG treatment and make a sound investment with cash that remains than defer and make poor investment decisions. 

Becoming a property owner.The hardest part about this right now is underwriting deals, remaining patient and disciplined.Outside of that, the actual details of managing the property are only hard if you do not have systems in place, delegate responsibility, and don't fully comprehend what physical asset investments require-- capex & opex heavy.

Home 1 is ideal for a fix-and-flip loan to fund the remaining $90K, which I can help you evaluate options.

In 4 or 5 years you will have appreciation and a solid number of years with 2% remaining.  

I know you are dealing with a 3 month lease rather than a 12 month lease, but for example....Say I rent my home for $2,500 per month and have to lower my rate by $100 to find a quality tenant that is a loss of $1,200 over 12 months compared to a loss of $2,500 for each month it remains empty. 

My goal is to buy a house in the area and house hack the remaining rooms.

If the supply of Airbnb vacation rentals is artificially suppressed by regulation then those that remain may very well thrive.