I invest in real estate but for diversification I also have money going into several Vanguard index funds.

For instance, I recommend to consider whole life, if you have a disabled or special needs dependent, if you've already maxed out all tax-advantaged plans, if you seek asset protection, if you need more diversification or your financial portfolio.  

It'll be 2009 all over again, and unless you want to see your hard earned cash evaporate or give your real-estate back to the banks, diversification is your best option.Oil & gas and real-estate are considered identical in the eyes of the IRS.

In addition to diversification, I am interested in REI for income replacement in retirement (when it comes) and for its tax benefits.I've read quite a bit of info on this site and others like it over the past months, but am still paralyzed.

Since I'm primarily interested in diversification at the moment, my guess is that if we do decide to jump into real estate, it will probably be in a more mixed form. . . starting with a SFH and picking up one or two MF later.  

I haven't personally done this since I've stuck with SFRs, giving up some of the better cash flow and diversification from multi's in exchange of a better renter pool, appreciation, and liquidity of SFRs.... again, a great question for your mortgage broker/banker, though; this is why it helps to network and build your local REI team, as well as your virtual one here on BP ...

Diversification is good; remember when Houston looked so great before oil prices tanked?    

In my opinion, the name of the game is diversification.

Diversification and amenities are important.  

You will not have any appreciation, nor inflation protection, but you can get good diversification/risk reduction, and decent principal protection.