My tenant, who has 5 kids with her(all are named in the lease ) wants to do a home daycare and take in 1 or 2 kids. Is that a good idea? She says she will get insurance. She did not talk about license or stuff like that. . I already pointed out other tenants might not like it, but she claims they will be ok. 

This comes up more than you'd think. The near unanimous consensus is "hell no". 

Sounds like it is not a SFR, but a multi-tenant building. If that is correct, the other tenants will hate you and they will leave.

There will be a ton more wear and tear on your unit. You will be sued if something happens. She'll have insurance? Great, but when my kid needs 24/7 lifetime care after an injury and the jury awards me $30M, her policy isn't going to pay out much and I'll be collecting the rest from you for the rest of your life. 

Check your local laws. In some areas you cannot say no to a child care business as long as it is under X number of children. 

I think it is a terrible idea and the worst part is you can't stop her from doing that as long as it is licensed and insured, and she keeps it small-6 or 7 kids. She has to give you 30 days notice and from what I know you can't deny her. 

You will need to make sure that you take safety precautions for the kids and get additional liability insurance to protect yourself. Even if the tenant has insurance they will sue you anyway because LL's are loaded-I read that on the Internet so it must be true.

I do not know what you can do about raising rent or giving her a notice of termination. I'd be sure and get some legal advice.

There would definitely be liability concerns.. you're effectively now responsible for the "building" this business is operating out of. She can be insured, but if a kid gets injured somehow or someone slips and falls in the driveway, etc., there are a million ways that could come back on you.

Lots of leases include a line like "Tenant shall not operate any business on the premises" for that reason.

Good on the tenant for asking.  But that would be a solid no.  In addition to liability the wear and tear on this property would be sky high.  

Other than "I want to start a fire-eating show in my rental" and "I would like to start a pet sitting business in my rental" I am not sure if you can have a worse request or one easier to say no to. You rented to someone with 5 kids, that's a good thing, but don't agree to allow random children to be dropped off every day at the same rental that might already be busting at the seams. The liability consequences are astronomical and the inspection requirements would be hellish to even get it approved.

Thanks for all your replies. This is in Evanston, Illinois and I went through the daycare licensing requirements in the village website and they are pretty stringent, requiring inspections from Fire department, Health, police reports etc. Tenant says there are home daycares in adjacent properties, they don't show up in the home daycare listing in the village website and obviously unlicensed. 

I agree with all of you, not a good idea !

The State of Illinois requires a daycare license if something like five or more kids attend daily. Local authorities have their licensing requirements.

Is your property zoned commercial? Can it have a day care? How soon will your insurance be cancelled if there is a change in tenancy?

In my former life as an insurance adjuster I investigated the death of a 16 month old who chocked to death on marshmallow bits. The company I worked for denied coverage since they were never informed there was a day care on premises. The tenant had NO INSURANCE for her business and nothing worth taking.

You do not need this. Let your resident out of their lease if they find someone to take them. High probability they will be baby sitting without your knowledge anyway.