You might as well buy gold bars, silver, and wheat)You consider even less effort can be placed in the an Index Fund for the S&P, Dow, Nasdaq, Muni Bonds, Heck even a Money Market Fund, and my money would be liquid, and gain way more money. 

You don't want to over-engineer/design your existing house because your house will be valued on comparables.For financing, you can look at regional banks/credit union or HELOC to tap your existing liquidity.

I am now hunkering down and streamlining my budget to have as much liquid cash as possible to execute in Q4 2018 when conventional wisdom seems to think sellers become a bit desperate. 

It really is laughable.There are much better investments for a lender where they could stay liquid and collect 4% versus loaning on a hard asset that may or may not pan out and perform.Lenders price in risk for a reason.

That way they might want to liquidate their house to get rid of the lien.

I am wondering if anyone has thoughts on taking a security deposit and investing it in a liquid investment (ETF or Index funds not a CD).  

I would check with an accountant/tax expert (that's not me) and clarify the gains exemption.Once liquid maybe you then invest in a market like Phoenix, AZ where you can buy solid rentals for under $200,000 all day long.

Alternatively, you can defer some of the upgrades, or do them in small phases so as not to hamper your liquidity. 

And they do allow lower investment amounts.How much you should invest will depend on how much liquidity you have.

I know the Broward Real Estate Investors Association has a sponsor that does hard money lending but they only cover 90% of a deal and require a minimum of $20,000 in liquid money.