Other than that if they are paying on time and not destroying the place then leave them alone. 

Carpet is depreciated over a five-year period, what happens if your tenant destroys it in year two?

I wont bother getting educated on that then.

I was planning on at least replacing then flooring as good faith and to justify the rent increase but seeing their living conditions (not the cleanest) my wife is worried that if they stay they will destroy any upgrades we do on the home.

My perspective on this is as a married DIY landlord in Pittsburgh, across the Commonwealth.I've watched this life wear people down to nubs, destroy seemingly healthy marriages, even cause the children of the DIYers to try to commit suicide.

My damages aren't a sum certain, but WOW -- I start off on Airbnb basically with my reputation destroyed; that's worth real money.

-the lot wont sell, and it will be neglected (grass not being cut, etc)-they build a garage or shed and store stuff there.What are your thoughts regarding this ordeal? 

You wont be happy if it isnt cash flowing.

@Steven Schaad one of my HOAs destroyed my returns with a special assessment (27k) to replace the risers in the entire building.

They will destroy your house.