The station at Paignton, near the town centre, bus station, hotels and beach is what attracts the punters. I doubt a limited steam operation just from Churston to Kingswear would be anywhere near as popular.
The steam railway is a very popular and successful attraction. I and many others would not like to see it go, though I am in favour of improved regular rail services too if they were feasible.
I suggest two options might be explored for extending National Rail beyond Paignton while keeping the steam operation.
1. To Goodrington only.
This is fairly easy. One of the Goodrington carriage sidings becomes a passenger running line and is extended to a new platform just to the south of Tanners Road overbridge. There's room for another independent track under the bridge, though the turnouts for the DSR engineering yard will likely need moving south a few metres to make space. Local Devon Metro services are extended one stop to the new terminus, which reduces platform occupancy time at Paignton. Car parking is provided in the existing council run seasonal facility adjacent. Easy interchange with buses is possible here too, and if the DSR also reopened their platform, they could also benefit from customer parking, difficult in central Paignton.
Sands Road level crossing needs to be upgraded from its train crew operated status, as it's far too time consuming to use frequently on the the NR side. I suggest a AFBCL Automatic Full Barrier Crossing, Locally monitored. Although it's only a 2 barrier crossing, it's one way for vehicular traffic so conforms to the requirement this configuration has for separate entrance and exit barriers. For up approaches from the south on NR and DSR, the crossing would be initiated automatically by a strike in track circuit and treadle arrangement. For down trains the crossing would still be initiated by crew operating a switch but that can be on the platform at the usual stopping point and crew can just press it once and get back in the cab, rather than having to supervise the barrier lowering and then confirm the crossing is clear. The automation, including OD sensors, takes care of all that and if the flashing red lights are working, barriers are down and still intact, and there are no obstructions detected, the drivers flashing white light will show and the train can proceed.
2. To Churston.
This would see the infrastructure between Paignton and Churston transferred to NR/GBR, and the local service extended to a new dedicated platform at Churston, but steam would continue to run to Paignton in an arrangement similar to the NYMR at Whitby. The constraints on the single line could be managed by flighting trains using extra intermediate signals and having separate platforms at Paignton and Churston.
A dedicated NR terminal platform at Churston
View attachment 210079
Sands Road crossing would still need addressing for more frequent trains. All DSR locomotives permitted to Paignton would need to be equipped with mainline safety and communication systems: AWS, TPWS, GSM-R etc, as they are on the NYMR, and central locking of passenger doors might be a requirement. How much work is done at Goodrington would depend on what the intended functions of the two new stations were. If the intention is to provide a railhead with better parking than other NR stations in the area, it matters little whether it's at Goodrington or Churston. For bus interchange from Brixham, you'd leave the same bus at Churston, Goodrington or Paignton. It's not neccessary to provide big 'railhead' car parks at both stations. Goodrington is a less sensitive area for this than Churston with its large houses and golf club, and there's already a large seasonal car park at Goodrington, so I'd not provide a station car park at Churston.
I think going to Goodrington makes most sense, as the railway systems remain segregated. Under the Churston option, transfer to NR/GBR would lose the DSR liability for maintaining two large viaducts and a vulnerable clifftop section, but at the cost of many new safety systems if they want to continue operating to Paignton. With the rolling stock so fitted and a limited 'mainline license', perhaps occasional local steam excursions beyond Paignton might run. Day trips to Exeter along the sea wall? Run round and replenish in Riverside Yard?