Interesting Conundrum - Thoughts Please!

[Russell Caraotta]

I own a nice 2 family home (3 bedrooms, 1200 sq feet) with good rents in a demand section of Buffalo. My upstairs tenant (currently occupied by him, his long term girlfriend and their 9 yr old daughter) was about to sign our 1 year renewal agreement when he asked me if I would consider a 4 year term as they love the apartment. I like the idea of such security and guaranteed cashflow. He has never had any issues with rent payment on time. I said - "Let me think about how best to structure something like this."

He then asked if I could follow him to the partially finished attic. He inquired if I would be interested in completing the unfinished part to resemble the other section (dry wall, ceiling, insulation). No plumbing would be provided by me. No added electricity. Is it truly a finished 3rd floor - not really - but it will be an upgrade (and increase the resale value of the home). He said he would like to have it available for a couple of his other kids. I envision some framing lumber, drywall, insulation and flooring. So the 3 bedroom apartment can effectively provide sleeping space for at least 2 more people.

I'm curious to hear your thoughts on 1) the structure of an extended lease and 2) The impact of attic modifications on rent. Is it as simple as spreading the cost across X months? My thought is if we do a 4 year lease, I would spread the cost of the upgrade across 24 months to arrive at the new lease payment. In other words, if the cost of the upgrade is $4800, I would divide it by 24 months to arrive at his new monthly lease of $1300 (he currently pays $1100 per month.)

Thanks for your consideration!

Russ