Am considering renting a room in my house and want to investigate this opportunity. not as lucrative as STR but helpful still and less of a hassle for background checks.  

This winter, we'll close down for 6-8 weeks to remodel before reopening with a fresh look.

I would terminate her lease and start fresh with someone that abides by the agreement.

An insurer frequently doesn't even know the use of the property being insured particularly when it a SFR.I have personally had to provide a state investigator an explanation not only of how I reached a coverage decision but document the timeline during which those actions were taken when an insured had submitted a complaint. 

Basically you need to understand the books for a multi-family property, and know what is average cost for each line item, and know which line items should be present.If something is out of line with what you expect it should be--investigated further.If you see no charge for Landscaping (Lawn Mowing) for example, or see it at $30 and you know the average for the area should be $1,000 for instance--find out why.Maybe they put in in Xeriscape, or maybe the owner just cuts it himself and the $30 is for a couple of pretty Azalea's he planted next to the front door to spruce it up for sale a bit.Or maybe the lawn has turned to dirt (and mud) from so many people walking across it (as in the pic below) of the Class-C apartment building. 

If they are more than 15% below market, I prefer to get rid of them and start fresh. 

We have already replaced the carpet in the whole house with high end carpet and padding, replaced some appliances, had a brand new AC and heating pump installed, fresh paint on the whole interior, and redone the kitchen and bathroom cabinets.We would like to keep our monthly payment the same as our mortgage, so rather than sending the $2600 to the bank every month, we would send that money to you.

Something to investigate!

The bedroom he's in has new carpet and was freshly painted so I'm assuming those would have to be replaced and possibly some items around the unit.

Terminate the lease in November, clean the place up, and start fresh with a well-qualified renter that pays market rent.