The sulfur smell discourages many homes buyers in the area, but I often hear that is why the town is thriving.

Most of what I have seen on Zillow/Realtor/Redfin has been in the so-so parts of town with the occasional fixer upper closer to the more desirable areas. 

Should I look in town or does it matter if they're out of state?

Buy a house(s) as close as you can get to the heart of town.

My thoughts are as follows:Klamath Falls - yuck, lived there for years, no wayGrants Pass - Lived there from 1998-2004 - great small town, not much industry, in right neighborhoods could do rentals, going to get low class tenants if going multifamily, average working incomes are low in this area.

I have a rental property (town house) with equity 127,500(approximately).I owned it for 4 years 11 months with interest rate 3.625.For Cash Out Refinance interest rate is 3.5. 75 % of LTV is $60,745.Cash in hand is 54,825 (60,745 – 5,920).

The town now has 2 breweries, and is a quick drive from Black Mountain.

Some of the surrounding towns don't regulate STR, at least not yet.Regardless, if you purchase a property in any good size city that you intend to use as a STR, I would suggest you purchase it such that you have multiple exits. 

As will proximity to the town itself.

@Carlos Flores I wish I could make it to this one but I have just left town for the day.For anyone interested, check out another meet up Wednesday at Cigar City Brewing!