Despite the fact that the market has dropped significantly both in rent and price, I still think the market should be considered high risk/high reward.

Some thoughts on your situation overall:In terms of vetting, I personally there is a limit to how much you can mitigate risks when working with a smaller contractor.

Yet, too many of those posting advice for you have no clue on the risks they are advising you to take.You're pinching pennies to save $8k with 3 kids. - What would happen if you lost it all?

The cash flow portion of real estate is often related to risk and sweat equity, which is a different aspect of investment.

As long as you're doing that, there's always a risk, and 50 years from now it will probably be illegal everywhere to operate STRs in residential zoning, just like it's illegal to operate a steel mill there. 

Diversifying geographically can also reduce risk and increase long-term returns.For example, there are several markets across the U.S. that are ideal for new investors because they offer affordable entry points, reliable cash flow, and strong economic fundamentals.

You minimize your risk of violating Fair Housing Law or compliance issues using an experienced property manager.3.

Hey Santosh,As of right now you're extremely exposed regarding insurance and I'm going to assume legally as well.If the home isn't registered as a legal multi-family with the town that's something you'll have to correct ASAP and make sure the home is up to code.Insurance wise as soon as they find out what you're doing they'll cancel you as the risk has changed from a single family owner occupied home to a multi family owner occupied home.

There is a lot of these out there, I keep looking for a way to make them "work" but certainly can risk what little capital I have on a hope :)

Quote from @Chris Seveney: Quote from @Eric Henson: Do you guys ever take the risk of buying a foreclosure at sheriff sale with the previous owner still living in it?