They could just take their chances that the lender wouldn't know, but not the best way to be able to sleep at night?

If you go down that path, however, I would definitely make sure your replacement cost is locked down - I'd be shocked if the $6K is actually sufficient for the work. 

Again I'm commission only, but I recently heard that FreddieMac/AnnieMac changed their lending guidelines for self-employed and that 1 year could also be sufficient. 

I managed the rentals myself up until early this year when I hired a property management firm in order to get some free time back, have some backup so I can go on vacations again,  and in response to the hostile political environment towards landlords in seattle.My long term plan with REI is to get to a large enough door count such that with sufficient equity the net cash flow is enough to live on comfortably  (which I would define as matching my current gross software engineer's salary).    

There are other loan options out there besides FHA just as a heads up (5% and 10% down without having to pay the high "costs" associated with FHA loans).Each person has their own take, but if you are going in as an owner occupant I would personally advise trying to find not only a 2-4 unit, but a 2-4 unit with at least one current vacant unit so that everything can be a little bit more straightforward on the purchase.Also, if you do go the FHA route, the 2 unit one might be your sweet spot. 3-4 units have a self sufficiency test that doesn't usually pencil that easily in the Bay Area.

What about contractor investors who already have General liability coverage from their contracting business, would a vacant coverage be sufficient enough?

Some people can't sleep at night if their money is earning 0.1% in a savings account.

It consistently rents for 350/night I believe. sleeps 9 people.

I understand that most banks like to use this formula: (Value of home - amount owed) .8I have enough equity in the home to where 80% of the difference in value minus balance is sufficient to fund my construction project. 

Great way to get rolling in real estate and since you are paying cash for everything you don't have to worry about credit - AND - you will sleep well at night because everything is paid for.