If I were new I would simply stick to areas close to where I live.

Are you saying you want to STR rooms in the unit you are living in?

So we don't have guests in our living space anymore."

100% nightmare tenant that will likely get surprise roommates and a zoo of unauthorized pets while they live there and then claim "oh I didn't know that was against the rules".

I live in SoCal so if I wanted strong cash flow I would likely have to look out of state.

@Michael Smythe the repairs were never completed while the tenant was living there.

I'm assuming that this situation wouldn't pass inspection, but one could argue that all the spaces the guests have access to (i.e. bedroom, bathroom) are safe and habitable + the guests wouldn't be exposed to the kitchen.Also, do the city inspectors inspect other parts of the home the guests won't access (i.e. inspectors check the basement for water infiltration even though no guests would ever be living or even going down there). 

I live in a community where half the people never lock their doors.

She prefers they sell the house right now, as is, and live off their profit.

You can actually still find deals where I live in the (very) low 5 figures, and in some cases, still in the mid 4 figures.