Get him to sign something saying he will terminate his tenancy on XX date and will be paid $1,500 as a bonus to help him find new accommodations.

If you can put your money into an asset growing a x% and you can get a line of credit against that asset, then anything you do with the loan proceeds by investing it is a bonus on top of the return on the cash value.Its much more powerful than simply buying term and investing the difference.

That would give  your post much more exposure than a forum post. 

At your peril.noun exposure to injury, loss, or destruction; grave risk; jeopardy; danger: They faced the peril of bad renters.

It can be a "bonus/storage" room if it's not up to par with the rest of the house.

In away its almost the same as investing in Stock / Bonds. you pay retail and get a cash-flow return. appreciation is only bonus.

Having a potential buyer and saving some selling costs is bonus.   

What is my exposure if I end up buying the house (with clear title / title insurance)?

If you get a Personal Umbrella, which will go over your Home and Auto, your big exposure is in the Auto. 

Hi Matt,You're considering biting off a serious project with a fair amount of exposure/risk for your first at bat.