"Illegal" fifth unit...

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Hey folks, 

I purchased a four-unit rental property in Southern California, back in 2012. At the back of the unit is a studio apartment, that a previous owner must have converted (probably at the weekend) from two one-car garages. It's a very nice unit, which brings in $775 per month. It doesn't have its own gas or electrical meters. I somewhat gullibly said at the time I would call the city, have them look at it and see what they think... Everybody and their brother said, "No!!! Don't even think about it, just rent it out and pay the utilities." So, I did. Roll on seven years: Now, a realtor who's doing a valuation on the property tells me if that studio were legal, the property would be worth at least 70K more that way, and maybe a good deal more than that. My question: If I consider getting this studio legalized, am I opening up a Pandora's box? My thoughts are that I am, but the hastle may be worth it for the increase in equity. Has anyone out there been crazy enough to do this themselves with their "extra" unit? 

Your realtor probably knows a lot more about your local real estate, in fact I’m sure they do. But did they bring up the fact that if you make it a 5plex you’ve ruled out all the easy mortgages, long term lower interest deals? You’ve prevented any house hacker from buying it. You’ve eliminated it from every filter that people, put 4 units or less on. 

I know of properties that were specifically sold as 4 units with a 5th unit called storage or utility so they could get more money. Sometimes the owners use it personally or let friends/family use it. 

Does the fifth unit share a wall with any of the other 4 where you could make one bigger unit for more rent? Somehow make it part of any unit that could then rent it out on Airbnb as a “room” or “portion of the house”?


ps. I would assume they would say there were no permits, put it back the way it was or tear it down. In California do you fall under different landlord laws with 5 units? Is there any chance of the tenants turning you in if you ever try to evict you? Maybe ask for all their rent back? Will your insurance cover any injuries or deaths from people sleeping in a garage? Be careful.