To upgrade the shack you live in, you must have two things, lumber and ALOT of money.
Go to the carpenter's house and check to the right of the bed and there will be a sheet.
Check the sheet and it gives you a choice:
1. Kitchen
2. Bathroom
3. Log-terrace (Deck)
4. Baby bed
5. Stairs
6. Greenhouse
(These are not in order) Chose one and he'll say he'll be over to see if you have the money and lumber.
Go back to your ranch and if you have the materials, he'll tell you he will start tomorrow.