Too risky to convert and rent out illegal basement unit?

Member since 2019 · 58 posts · 9 votes

I'm in the middle of an deal for a legal two-flat in Chicago with FHA financing, but the numbers only work if I convert the basement into a livable space. FHA loan + expenses is $3000, Rental income with 2 units is $3k and the additional basement unit would be around $800-1000.

The basement has a separate entrance, but not 2 entrances/exits. Also I believe the utilities are connected to the 1st floor unit.

I just got an inspection done and sent EMD, but am having 2nd thoughts based on other people's sentiments about illegal units.

Please let me know if this deal is too risky to proceed with.

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Matthew Paul

Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes

Its a great idea ................until you get caught . The minute any of the tenants figure out its not a legal unit they have you over a barrel .

Why not convert it to living space legally and charge more for the lower unit ?

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Matthew Paul
Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
6y
Its a great idea ................until you get caught . The minute any of the tenants figure out its not a legal unit they have you over a barrel .
Why not convert it to living space legally and charge more for the lower unit ?
5 Reply
George W.
Investor · NJ · Member since 2018 · 869 posts · 921 votes
6y
I 100% agree with Matthew. If you're going to do it, do it the legal way.
Ive seen a ton of people here in NJ do that and it almost always comes back to bite them in the rear.
1 Reply
Emanuel EscarpitaPro Member
Rental Property Investor · Chicago, IL · Member since 2019 · 11 posts · 7 votes
6y
I know people who rent illegal units and have never had a issue as well as people who have been shut down and fined. If you’re relying on the illegal units cash flow, i would not recommend proceeding. Possibly think about renting it out as storage/ install some coin operated laundry machines. Best of luck on your first deal!
4 Reply
Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
6y
I personally don't like illegal units but a lot of of buyers specifically seek out places with an in law for the extra cashflow or to live in themselves. Really depends what you are comfortable with. They are pretty common in Chicago. There is also a chance with the Accessory Dwelling Unit proposal that owners will be able to legalize/up zone their buildings in the near future. If this passes it's going to be a huge money maker for investors from both an equity and cashflow standpoint.

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Frank S.
Specialist · Chicago, IL · Member since 2015 · 870 posts · 345 votes
6y
Only listen to the Chicago responses on this one because we have a large number of non-conforming units. That number may be close to 20%.

At 3k income and 3k expenses it's not a good deal. The none conforming unit sort of saves it. Did you account for all expenses? Repairs, CapEx, future management, maintenance, water, etc.

Is it ready to be rented? Kitchen, gas, appliances, etc.

More risk more proffit.

Don't write a lease for the unit. Make sure you have smoke and CO detectors. Provide fire extinguishers. Non smoking. Look for the best tenant, nurse working overnight, single person, etc. Children are noisy, but you can't discriminate. No pets. Take over utilities, if shared.
Better option, turn it to a duplex.

Good luck
1 Reply
Crystal SmithPro Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
6y
Originally posted by @Jack Plantin:
I'm in the middle of an deal for a legal two-flat in Chicago with FHA financing, but the numbers only work if I convert the basement into a livable space. FHA loan + expenses is $3000, Rental income with 2 units is $3k and the additional basement unit would be around $800-1000.
The basement has a separate entrance, but not 2 entrances/exits. Also I believe the utilities are connected to the 1st floor unit.
I just got an inspection done and sent EMD, but am having 2nd thoughts based on other people's sentiments about illegal units.
Please let me know if this deal is too risky to proceed with.

One of my first rule of thumbs about investing is "Can I get a good night's sleep because my company has done all it can to mitigate/eliminate the risk associated with a new deal" The only way to mitigate the risk of this deal is to determine if the probability of making the basement unit legal is high and the additional cash flow is worth the additional investment to make it legal. Without knowing that then the deal is too risky to proceed, because you're operating in the blind.

312-681-7487
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Louis Silva
Rental Property Investor · Chicago · Member since 2020 · 5 posts · 2 votes
6y
This just came out a few days ago
https://chicago.curbed.com/2020/2/28/21152809/adu-chicago-legalization-coach-house-granny-flat-affordable-housing
2 Reply
Kenneth GarrettPro Member
Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
6y
@Jack Plantin

Find out what exactly you need to do to make it legal. Emergency escape in the bedroom, proper ceiling height, smoke and carbon monoxide detectors, proper permits, zoning, etc. If you build it illegally will your insurance company cover you in the event of a fire down there. If the investment is based on the basement unit, I would not buy it unless I could do it legally.
1 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
@Jack Plantin Egress requirements are for fire safety. It is so you tenant doesn't get trapped in a burning building and die. So the worst case situation here is not a fine or insurance dropping you - it is a dead tenant and you are criminally negligent. In our business we don't mess with safety. If you want to let your grass grow long and pay the fine, whatever, but this is totally different.
2 Reply
Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
6y
I have gotten units with 1 egress legalized in chicago, twice actually. By just grandfathering them in with a water bill pulled off FOIA. There also are a lot of 50's and 60's build multiunits in chicago with 1 egress.
1 Reply
Anthony Rosa
Rental Property Investor · New York City · Member since 2019 · 703 posts · 538 votes
6y
You have a conscience and concerns that means you'll get caught and penalized. The ones who have been doing it for years without a care in the world get away with it. Just the way things work lots of times..
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Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
6y
Originally posted by @Jack Plantin:
I'm in the middle of an deal for a legal two-flat in Chicago with FHA financing, but the numbers only work if I convert the basement into a livable space. FHA loan + expenses is $3000, Rental income with 2 units is $3k and the additional basement unit would be around $800-1000.
The basement has a separate entrance, but not 2 entrances/exits. Also I believe the utilities are connected to the 1st floor unit.
I just got an inspection done and sent EMD, but am having 2nd thoughts based on other people's sentiments about illegal units.
Please let me know if this deal is too risky to proceed with.

Rule #1. Don't break the law!
Rule #2. Make as much money as possible!
========
So if the only thing stopping you from being legal is another exit, then bring it up to code and get it rented out.
========
Regarding adding a unit, some things that come to my mind are (not an exhaustive list):
Making sure the Zoning will handle the extra unit, and you have some plan for parking the extra vehicle(s), and that the sewer and water service can handle the extra load, as well as the electrical service drop has enough extra amperage available to satisfy the electrical code requirements of another unit.
You may also want to look into if there are extra fire requirements for three units, such as having to add a fire escape, or fire extinguishers, or interior sprinklers.
And sometimes major electrical work will require the whole building be brought up to current electrical code.
A local architect with local building upgrades like this in his portfolio might be a good addition to your Swiss Army Knife.
Good Luck!
0 Reply
Andrew Lake
Investor · Chicago · Member since 2020 · 18 posts · 16 votes
6y
@Henry Lazerow I'm a new investor in Chicago and am finding that many of the properties I'm interested in have non-conforming units. When looking at different properties on the market that may have such units, what is the process for finding out specifics of the zoning and what changes could be made to have the non-conforming unit legalized or the property rezoned?
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Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
6y

1) Find specifics of zoning. Call the Zoning Department and/or visit their website and review maps.

2) What changes could be made to have the non-conforming unit legalized. Having a local Architect with experience in these things, on your speed dial might be a good start, as well as an experienced electrician and an experienced plumber.

3) Having the property rezoned. Probably easier fish to fry than risking time on this.

Just my 2 cents.

0 Reply
Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
6y
Pull a FOIA water bill from 1950 and if it says 3 units, etc. you send uynto city and they send back a "corrected zoning doc". The city does not even visit property.
1 Reply
Natalie Schanne
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Jack Plantin - 1. Maybe keep looking for a better deal that’ll cash flow better. There will be distressed sellers and off market deals if you send direct mail.
2. It's FHA so you're living there for at least the next year. If you live in the basement and rent out the first floor that's ok. You need a direct egress - window or stairs to outside and also a one into the main house. You could also live in the first floor unit and have a basement "roommate" who has backup egress access through your house but stays 100% in his or her space. (Door can't be deadbolted on both sides).
3. I have been quoted 3-6k to turn a basement half window into an egress window with drainage so it doesn’t leak, so don’t underestimate these costs. Also zoning may prevent you from installing a stove or anything above a kitchenette / wet bar type setup.
1 Reply
Jack Plantin
OP
Member since 2019 · 58 posts · 9 votes
6y
Originally posted by @Natalie Schanne:
@Jack Plantin - 1. Maybe keep looking for a better deal that’ll cash flow better. There will be distressed sellers and off market deals if you send direct mail.
2. It's FHA so you're living there for at least the next year. If you live in the basement and rent out the first floor that's ok. You need a direct egress - window or stairs to outside and also a one into the main house. You could also live in the first floor unit and have a basement "roommate" who has backup egress access through your house but stays 100% in his or her space. (Door can't be deadbolted on both sides).
3. I have been quoted 3-6k to turn a basement half window into an egress window with drainage so it doesn’t leak, so don’t underestimate these costs. Also zoning may prevent you from installing a stove or anything above a kitchenette / wet bar type setup.

Thanks. It's a househack. So my primary goal is to spend the same to own instead of rent in the city. Once I save up more cash, I can consider making a legal garden with a separate entrance. The ceiling height is very good and it already has a finished bathroom, so I'm pretty comfortable with this deal still.

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Jack Plantin
OP
Member since 2019 · 58 posts · 9 votes
6y
Originally posted by @Henry Lazerow:
Pull a FOIA water bill from 1950 and if it says 3 units, etc. you send uynto city and they send back a "corrected zoning doc". The city does not even visit property.

So it could've potentially been a legal 3 back in 1950?

0 Reply
Benjamin E.
Investor · Chicago, IL · Member since 2017 · 72 posts · 13 votes
6y
@Jack Plantin when I run numbers I don't incorporate illegal anything into them. If the numbers work without it, and you personally plan on living in it, then it is a yes. If you plan on renting it out, good luck. Much better to keep.looking, especially in the market we are heading into. If the seller can get it certified as a legal 3 unit before closing, fantastic. If not, plenty of other options to come.
0 Reply
Jon Sat
Chicago, IL · Member since 2019 · 3 posts · 1 vote
6y
@Henry Lazerow What’s the Accessory Dwelling Unit Proposal? Where can I learn more?
0 Reply
Jack Plantin
OP
Member since 2019 · 58 posts · 9 votes
6y
Originally posted by @Henry Lazerow:
I have gotten units with 1 egress legalized in chicago, twice actually. By just grandfathering them in with a water bill pulled off FOIA. There also are a lot of 50's and 60's build multiunits in chicago with 1 egress.

This one is over 100 years old. Any recommendations for contractors that could give me a quote for legalizing the unit before my inspection period is over? Dont think I'll buy the property if it costs an insane amount to get it up to code.

0 Reply
Jerry N.
Chicago, IL · Member since 2016 · 172 posts · 38 votes
6y
One of your big costs will be if you need to dig out the basement to get enough ceiling height. I haven't read everything yet with the possible ADU. I'm thinking though the city will still have the ceiling height requirement.
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Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
6y
@Jack Plantin - the reason there are so many "illegal" units in Chicago is because they are probably grandfathered in (see below) creating a new one would not be covered under this provision. I HIGHLY doubt the cost to add a unit will be worth it based on properties I have seen

13-196-740 One additional dwelling unit over original allowed – Conditions.
A pre-ordinance (built before July 8, 1957) residential building or building of mixed residential occupancy, not complying with the requirements in force and applicable to the building at the time of its conversion, may be altered so as to legalize one dwelling unit, in addition to the number of dwelling units originally authorized, providing that said unit was determined by the office of the zoning administrator or the zoning board of appeals to have existed prior to July 8, 1957, and provided such building complies with the other provisions of this chapter. Such conversion need not comply with the requirements of the following specific provisions of this chapter:
(a) Section 13-196-660 (height limits); however, in frame buildings, four or more levels of living space shall be prohibited and in buildings of ordinary construction, with or without attic living space, five or more levels shall be prohibited;
(b) Section 13-196-050; however, all dwelling units must comply with the exit provisions of Chapter 13-160 except basement dwelling units may have a second exit through a room containing a heating plant;
(c) Section 13-196-670 (stairwell enclosures);
(d) Section 13-196-680 (corridor enclosures);
(e) Section 13-196-690 (dwelling separations);
(f) Section 13-196-710 (basement ceiling construction); however, if the basement contains a dwelling unit the entire basement ceiling construction is to be wood lath and plaster of half hour construction;
(h) Section 13-196-720 (heating plants); however, basement apartments are to be separated from heating plants with partitions of one hour construction.
(Prior code § 78-72; Amend Coun. J. 6-14-95, p. 2841)

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1 Reply
Tim Miller
Rental Property Investor · Laurel, MD · Member since 2016 · 383 posts · 382 votes
6y
@Jack Plantin: First check with the local government to see if it's legal or not. They may say, ad is no but put in a bigger window or windows and it would be legal. Then get and electrician in to how much it would cost to get the unit set up for its own services. Good luck.
0 Reply
Brett P Holmes
Rental Property Investor · Chicago, IL · Member since 2017 · 9 posts · 4 votes
6y
There's so many buildings with non-conforming units in Chicago. I think that the entry/exit difficulty will make it tough to turn it into a legal unit, but we've never tried to be honest. I've had 3-4 buildings with illegal units that were that way when we got them. The owner couldn't advertise them as such, but the income generated was factored in. I'm not sure how the city reacts to units that were already there if you "get caught". I think that some good points were brought up already. It's good to be above board but there truly is a gray area if you acquire a property where it's already there. Doesn't sound like this is the case here...
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