Renting an unpermitted apartment????

Question

I'm looking at putting an offer on an amazing property on the beach in Washington state.  There is a main house which I would intent to STR and use for myself, and a huge garage with two small finished apartments, a 1-bed 1-bath and 2-bed 1-bath, separate entrances to each.  Problem is this garage/apartments unit was Not permitted.  I've walked through it and it seems solid, have not done an inspection on it yet but would if I put in an offer.  I'm wondering though is this a dud in terms of rental prospect?  I can't landlord this thing myself, I have to have a property manager as I am out of state and I simply don't want that responsibility.  My agent says there are unpermitted properties all over and regulations are very lax, she does not see anything to worry about renting, but I worry!  The house is also very expensive for me, so I am dependent on these units being rented either STR or LTR, in order for me to afford the monthly payment on the property.  If I can't get a property manager to rent them, I'm going to be in way over my head!  What do we think, will a property manager often decline to manage an unpermitted ADU?  What about insuring an unpermitted ADU for rental?  What other problems could I run into?

Bruce Woodruff · Answer

No, never rent out an unpermitted anything. If a tenant or house is involved in anything like a fire, electric emergency, eggress issues, on and on.... you will be in big trouble. The city will come down on you, your insurance will deny payment on any claims, etc....

So either get it permitted retroactively (this is not always easy or possible!) or pass on it. Just my $.02.....

Kerlous Tadres · Answer

Unpermitted units can be rented, and many people do it, but it’s a risk. Property managers are hit or miss some won’t touch them because of liability, others don’t care as long as it’s safe and rentable. You need to call a few local PMs before you offer to see who’s willing.

Insurance is another big one. Some policies won’t cover unpermitted structures or will exclude liability claims. Talk to a broker who handles rental properties don’t guess.

Also, think about whether the city cracks down or a neighbor reports it. In the worst case, those units could be shut down. That’s dangerous if your numbers rely on them.

If you’re stretching financially and need those units to cash flow, this deal might be too risky unless you can eventually permit them. Do your due diligence, talk to PMs and insurance now, and don’t skip inspection.

Bruce Woodruff · Answer

Some ( a lot) of the Building Inspectors are just Aholes. A lot of the ones I had to work with were wanna be GCs who couldn't make it running their own business and ended up working for the Govt. They resented real contractors and made it hard for them whenever possible. A lot of 'small'-man' complex going on. The good ones were really good though...

Charles Perkins · Answer

I would pass.  First you have indicated that this is a significant investment on your part.  It sounds like you are already looking at ways to increase cash flows just to make it work.

Second, while cities might not verify permit status in a particular city, it doesn't mean they won't at some time.  You add even greater risk in this situation.

Third you are out of state.  Washington has very tenant friendly laws.  Any tenant could inform the city and look to sue or weasel out of rental payments.  You risk a serious loss on this account as well.  Personally I have been a landlord in Washington over 30 years and think twice about it.

The risks taken are not justified in your situation with much real returns.

Caleb Brown · Answer

Agreed with Bruce. Agent might be pushing for the commission check but I would never roll the dice. You could be the lucky one the city chooses to shut down and fine. You can explore getting them permitted. Most cases it's difficult and too costly. If you are were local then maybe. I would be leery of the agent too. I don't know the intentions and they could be right with the city being lax but that's a red flag.

Jonathan Klemm · Answer

This is actually a pretty common occurrence here in Chicago.

The simple and low risk answer is what @Bruce Woodruff metioned, don't do it.  Now, everyone' risk tolerance and circumstances are different, so you may be at a point in your journey where the risk is worth the reward.  There is a difference between non-conforming, aka doesn't meet current code, and unpermitted work, so just wanted to throw that out there as well.

Your tenants can and should still be able to get renters' insurance.

Henry Lazerow · Answer

It depends where you are. In Chicago there’s thousands of in-law un-permitted units and no one really cares, they are actually very desirable for house hackers.

David Krulac · Answer

In a neighborhood of single family house, that I owned a property, a contractor build a second separate house in his back yard to rent out.  He did this without any permits.  when he went ahead with his rental plans on the newly completed home, the city inspector came calling.  They told him that he could not ever rent the house because it was unpermitted.  He tried for 20 years to rent unsuccessfully.  He even offer to rent the property to the city rent free as a polling place twice a year, and the city turned him down.  A safety inspection would not make up for a building permit.  Some aspects of the building are hidden by finished features of the building.  On one of our major addition projects, done with all the building permits, the insulation had to be inspected by the city before drywall could start.  Surprisingly the "by the book" city inspector shut down our work project and sent all the workers home.  Our code violation... we had a staple for the insulation every 6 inches.  The Code requires a staple every 12 inches, so we had to remove 50% of the staples to be code compliant, and get the "Stop Work Order" removed.

David Krulac · Answer

PS @Jen Geisler for me I would either pass on this deal OR I'd buy it at the price for the permitted building and assign NO VALUE to the unpermitted building.

Bruce Woodruff · Answer

I thought I had heard it all, but that is one of the most idiotic things I have heard re Building Inspectors. They usually don't penalize extras, only omissions. I might have gone over his head that time, if that is possible...

Renting an unpermitted apartment????

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