I skipped over some other benefits here, such as depreciation and other tax benefits, diversification within your portfolio, how much time you are willing to invest, and probably more.  

For budgeting and reserves, I used 10%, and in servicing I was advancing payments then collecting, something much different than the average note investor.Loan diversification is important as well, you can follow bond theories that apply to notes.I'll say too that churning those notes purchased at a discount, refinanced at PAR quickly pushes your yield skyward and the tax issue is more irrelevant IMO, when your yield is 50% annually you can afford the taxes.As Dion suggested, it's a function of yield over time, don't forget time and the velocity of your money. 

When things go bust for the major employer, the whole town gets decimated.Picking diverse markets for REI is similar to stock market diversification; it spreads the risk.Must you always have your secondary market out-of-state? 

I want to invest in real estate for diversification purposes and also earn additional cash flow.After all your advice and comments, I believe I should have the house appraised and keep looking.

In my opinion, crowdfunding offers an opportunity for a bit more diversification.  

B gives you a tad higher rent and more diversification......

That's why I buy into those deals through a self directed IRA that I manage.If you want diversification, another option is AlphaFlow.  

And the diversification plan sounds like a good one.

Made a small investment here for diversification.

I believe that using a local expert as a partner leads to a lower barrier to entry and faster diversification because of the deals you can take advantage of.