Though many investors bend the rules and possibly don't get caught, you have the financial situation to do it correctly.

How do I protect myself in this situation, while also helping a relative? 

I'm currently flipping properties in my backyard (SoCal) and have the liquidity to fund multiple projects.

For all you know it a violent situation and she could get a judge’s order and you pry couldn’t/shouldn’t charge then. 

This relative to my situation, is a super modest amount of funds.

There will be more wear and tear and multiple headaches with several different renters.

I am not sure which is best for our situation or what to pitch.

Plus, very important to understand the new layout and how the dig down will effect the existing stairs, plumbing, etc.Happy to connect and talk through your specific situation because @Bruce Woodruff mentioned every project is different and know one price fits all espeically with these complex jobs.Where at in Chicago is your building?

I'd really appreciate hearing from you if you’ve been in a similar situation or have any insights.

Here is how we usually handle situations like this: if a tenant communicates with us, we usually try to work something out with the tenant.