Namely, that if a tenant (in this case accompanied by a whole family) ends up stop paying rent and I would be on the hook for both covering the mortgage and dealing with open ended legal costs and time.

@Ryan Daniel  I will preface this with the fact that I have a legal background, specifically with estate planning and asset protection in relation to real estate investments.

I am not sure of the legality associated with this and the issues of going from 4 units(residential) to 5 units (commercial) even if one unit will only be owner occupied.

Yes, it's crucial to get the right structure in place—setting up an LLC in the state where you're operating can offer liability protection.

Holding properties in an LLC (or other legal entity) can offer valuable protection for your personal assets, so I understand why you went that route.

We not only offered them a better comp package, but we offered them the opportunity to work for people who knew real estate investing as investors, not just as lenders. 

A lot of universities have students that need mid term housing due to graduation dates, mini semester programs, etc. and I've found if you approach them and offer them a solution to this problem, they are willing to work with you and help send business your way. 

I also understand accounting and legality may play a role.

Your client should consult a real estate attorney to draft an agreement with the ex and ensure there are no legal or tax issues, especially since this is an investment property.

he is offering to bump his offer from 12 and 15% to 14%and 17%.