Adding a 2nd story to a Cape style house

[Jason Hatfield]

Hey all.  Sorry to be so needy but I'm trying to wrap my head around this property and I'm driving myself insane :)

Legally this is a 1 story 640 Sq foot 1 bed 1 bath home in Chester County PA.  Owner has a long term tennet renting it for $1,000 a month plus all utilities.  Tenants are using a quasi finished basement as a 2nd bedrooms and a room in the sort of finished attic as a 3rd bedroom.  Neither are legal but this is an accidental landlord who doesn't know any better.

I can buy the house on a subject to deal for $66K at 5.5% but would also have to pay off a lien for $10K cash.

There are two ways I could proceed.  

1:  I keep it as a legal 1 bedroom.  Refinish the existing hardwood floors and put in a new kitchen.  Plus paint and I'm looking at being all in on a property for just under $100K.  I can then rent it for $1,000 as a 1 bedroom.

2: I convert the upstairs space and end up with a 3 Bed/2 Bath that will be worth approx $250K and/or rent for $1,500.  Doing this will be PRICEY!  Floor to the highest point of the ceiling is only 6'6 so I would need to either raise the existing roof (10 years old) with a Crain, frame in the new floor and reattach the existing roof.  Or I could raise it a few feet and then add dormers.  Otherwise I would have to do a complete tear off and rebuild of the existing roof.  I would then have 640 sq feet of blank canvas to work with.

Has anyone ever done a project of this scope?  How did it turn out and how expensive was it?  Retail quotes for a tear off and rebuild are pushing $100K so I'm not sure how much I can save with investor friendly contractors.

Thanks as always