But also consider the legal limitations/costs in each market. 

Family/friends isn't an option for me, and I don't want to go the self directed IRA route because there are too many benefits I can't give up on (loss of passive loss deduction, can't do work int the rental myself, can't even save on commission as a real estate agent apparently).Thanks for your thoughts.

first you have to decide what you want to do in the note business.. what most of the responses are talking about is buying bad debt.. and 2nds at that which this is the most risky and the most work..if your looking for work and risk and job then that kind of note investing is for you.If your looking for Passive income with no work and Limited risk then you simply need to align with a great HML who takes on private clients or those that understand where performing notes are generated.. we have done over 1700 performing notes for clients that last 5 years and really don't advertise at all. simply because once you get conservative investors in your program it just feeds itself.. deal flow is the key right now.. most have a hard time finding quality. finding defaulted seconds is easy.. and the most risky. 

I want to avoid personal guarantees and limit my cash outlay as MUCH as possible.

Maybe there is a time limit for minimum time living there that I don't know about, but I think you are fine.

Not to mention (and YES< I'm pulling this card), that I have a very limited budget, have 2 young kids, and am 7 months pregnant dealing with this issue from the east coast while my husband works full time, me part time, while taking care of our children on a tight budget.  

I grew up in the Bellevue area and if you are willing to live right outside the city limits, there are other areas that can work well for both rental homes and or a primary residence.

MLS is very limited in most markets because a lot of people have no need to list on MLS because of the hot market.

Plus, I'll be building equity so it's not that much of a loss.  

My husband went to Upper Limit Aviation@ SUU and it was quite a bit more.