How to make live node preview? I need an instant preview of what an entire node will look like before getting published. Ideally preview gets updated by every change user makes to the form., probably in an iframe beside the form.

The closest I can get is using Page Preview Module, but I need it without the context of a fully rendered page and without having to click preview button.
Have you looked at the Spark distribution? 

Rather than placing the preview next to the form as you propose, the Quick Edit module (in-place editor) allows you to edit certain fields while they're still in their original context. The Responsive Theme Preview might also be useful to you.