It states in part that:The owner shall maintain all means of egress at all times in a safe, operable condition and shall keep all exterior stairways, fire escapes, egress balconies and bridges free of snow and ice, provided, however, in those instances where a dwelling has an independent means of egress, not shared with other occupants, and a written letting agreement so states, the occupant is responsible for maintaining free of snow and ice, the means of egress under his or her exclusive use and control.

Don't formally convert to a duplex but see if there is in-law unit or accessory dwelling unit legislation that is often less stringent.

Without having all the details its difficult to say with certainty, but the asking price vs the monthly revenue stream doesn't suggest its compelling. 

I would like to ask  @John Leavelle and others, how do you get over that psychological hump of owing large amounts, even if income stream is very stable?

You might be able to find info on owner-occupied homes vs total dwellings in the area which should provide a nice snapshot of rental demand in that particular town.

In areas that don't accept water well, there are usually two reasons: 1) in some cases, the area is already too wet-- think flood zones, wetlands, swampy areas, areas near rivers & streams. 

You need to confirm that this is the code of law that your tenant quoted in the notice.Unless there is a very recent change in the Washington Landlord/Tenant laws, your tenant is bound by the terms of your lease and is liable for rent until end of the lease, except if the tenant is called to active military duty, victim of domestic violence/ stalking, victim of landlord's harassment or if the dwelling is unsafe to live in.Even though the tenant may still be liable for rent, since he has given notice of early termination, you must mitigate lost rent by putting in good faith effort to re-rent the property at fair market value.

(A) A landlord who is a party to a rental agreement shall do all of the following:(1) Comply with the requirements of all applicable building, housing, health, and safety codes that materially affect health and safety;(2) Make all repairs and do whatever is reasonably necessary to put and keep the premises in a fit and habitable condition;(3) Keep all common areas of the premises in a safe and sanitary condition;(4) Maintain in good and safe working order and condition all electrical, plumbing, sanitary, heating, ventilating, and air conditioning fixtures and appliances, and elevators, supplied or required to be supplied by the landlord;(5) When the landlord is a party to any rental agreements that cover four or more dwelling units in the same structure, provide and maintain appropriate receptacles for the removal of ashes, garbage, rubbish, and other waste incidental to the occupancy of a dwelling unit, and arrange for their removal;(6) Supply running water, reasonable amounts of hot water, and reasonable heat at all times, except where the building that includes the dwelling unit is not required by law to be equipped for that purpose, or the dwelling unit is so constructed that heat or hot water is generated by an installation within the exclusive control of the tenant and supplied by a direct public utility connection;(7) Not abuse the right of access conferred by division (B) of section 5321.05 of the Revised Code;(8) Except in the case of emergency or if it is impracticable to do so, give the tenant reasonable notice of the landlord's intent to enter and enter only at reasonable times.

In exchange for free rent/utilities/internet/streaming services, they would buy food, cook and help me take care of my dogs. 

It actually has become and additional income stream.