D 506(b) to purchase real estate notes with investors. 

The first misunderstanding is that they compare a Chicago B or C area with a Milwaukee D neighborhood, which makes the price difference look spectacular.

Based on what you laid out, if you're going to DIY the 1065, you'll want to become familiar with maintaining 704(b) capital accounts and read about 704(c) property and the associated tax allocations.This isn't really something that's advisable DIYing, but if you're willing to put in all the research and reading, perhaps it is possible to get the 1065 materially correct.

I'd love to hear from other investors who either a) can recommend a lender that will do a HELOC on an investment property or b) recommend doing the cash-out refi instead (and if so, why please).

Average caps for my market....C- 8%-12%+B- 6%-8%+A- 5%-Our market is pretty linear in the market corrections. 

You can take all that cash (that you created) out of the deal provided you a.) have it leased so that the house will still cash flow with the new mortgage PITI, and b.) feel comfortable with that amount of leverage on the property.

Usually the 2 best indicators of the market pace slowing down are (a) build-up of Actives with a steadily increasing ratio of Actives over Pending, and (b) longer days on the market.

James B.

Plus, I've heard great things about B or C markets in other states (Texas, Alabama, Arizona).

If I were to guess, they won't be "luxury", but class B.