1. Quit my soul-sucking full-time job and start working part-time or as an independent contractor.
2. Convert existing 401k/IRA to a self-directed IRA. I don't know how to do this but I think it's possible.
3. Use the funds in my self-directed account to purchase investment real-estate ($50k homes)
4. Rent those homes, looking to net around $500 each
5. ???
6. Profit!
1. There's no need to make this an all-or-none proposition. Research thoroughly, buy your first place and see how it goes. If it goes well, use the profit/positive cash flow to do a second deal. Repeat as often as desired. If also desired, quit soul-sucking job. Even owning several, even low-double digits likely won't cost enough of your time to "force" you to quit your job.
2. Not an expert here. But I've read a few articles that suggest this strategy and even those that promote it make it sound like a complete bear to manage because every single closing cost fee, utility bill, etc must be paid out of the IRA account. And I believe the articles all claim that self-managing any part of the "business" is not allowed. I also believe that by holding inside of an IRA, you'll lose the ability to claim the expenses (including depreciation) on YOUR personal tax return. Research further, but I'm guessing you'll nix this option quickly. Please report back if that's not the case.
3. Same answer as #2. Probably not the best WAY to buy. If you are buying a $50K house and the bank requires 20% down, you only need $10K to get started. I'd then work on building a small operating nest egg before buying second place. If you want to start right away and can't set aside $10K in a non-retirement account, you could consider withdrawing from a Roth IRA, if you have one. I'm not advising that. I'd scrap together $10K in a taxable account first.
4. Yes, if you buy one, you should rent it out :) Be sure to accurately estimate your expected income, but more importantly all your expected expenses. This forum in addition to your friend should be able to help out here.
5. Just run it like a business, that's what it is. One won't take much time/effort at all except during the research/purchasing phase. Tenants moving in/out and dealing with maintenance issues will happen. If you can deal with owning the place you live, I'll bet you can deal with owning a rental. Buy at a conservative price-point so if it doesn't work out you can sell in a year or two and not lose your shirt.
6. Yes. If you do decide that it works well for you, the cash flow (and tax-deferred savings from depreciation) will help fund the down payment for the second place. Income stream from 2 places will put you in a position to buy a third even faster. That's the beauty of investing for cash-flow. You don't need to jump in with both feet at once by cashing in retirement accounts. You'll be surprised how quickly multiple investments with solid positive cash flow will add up. It's your choice how fast to ramp up your holdings or when to let the holdings sit and start providing cash-flow that you live off instead of reinvesting. Controlling your leverage is another lever you can use to control your cash flow.
Just don't forget to put enough back for each property to pay utilities, repairs, some capital improvements, etc.
Edit: And research enough to fully understand the tax-benefits to investing. Download a blank Schedule E and see what your taxes would look like. Depreciation will help shield (defer) some of the realized income, which is a great thing. Just don't forget to make an exit strategy, because selling outright, all at once will leave you with a big depreciation recapture bill. Read up on 1031 Exchange. It may be a part of your exit strategy if you don't just plan to hold till you die. It's all in your favor.... you just have to make it part of your plan ahead of time.
hope that helps. Get started, don't let your friend have all the fun!