Well, I have several thoughts on this as I have my own home studio as well, but I also spent a lot of time reviewing gear on this website I have here:
http://yourhomerecordingstudio.com/

Take a look at some of the sections you are interested in, there are good and inexpensive mics and multi-track records etc. These days you really don't have to spend a lot.

Feel free to ask about some specifics after you have a browse-thru.
cheers

ps
yes, playing with your guitar friend would be a great idea!