I am looking at 2-unit apartment buildings and many of them have a "3rd" unit as a garden or basement. Because they are out of compliance with zoning, it seems that there could be some exposure to city violations, etc.
One solution is to incorporate the garden into the 1st floor unit as an apartment with a basement. This has some expense in adding a staircase to the living room. But the basement is part of a legal unit and thus voids the illegal unit issue. The rent on a 3rd unit garden could be +$500 to the cash flow, while the rent for on the 1st floor for an extra 2-bedrooms and extra bathroom in the finished basement could be +$300 to the cash flow. So for -$200 the legal issue disappears along with the extra tenant.
Here is where I need help. I had an idea to rent out the 1st floor unit and give them the basement as well as related living, but without adding an internal staircase. In other words, the 1st floor tenant will get keys to a 1st floor apartment and also have keys to the finished basement. This is great for privacy too.
Just wondering if that idea would bring me in compliance with zoning as a 2-flat.
@Dooreuhn Cee I am not an attorney or qualified to answer from a legal standpoint. But speaking from what I have seen, obviously this structure is ridiculously common. The answer is different depending from what standpoint you are asking.
Lots of places have an illegal basement and what makes them illegal is that they do not meet code for someone to live in them. However, if they are being used for storage or something like that, it is a non-issue. If you want someone to put a bed down there and live, then regardless of whether or not it is a completely separate unit, for separate renters, you have to bring the unit up to code (and meet the zoning requirement). Typically the unit lacks two egresses or something like that. If you are just renting it to them as extra square footage and storage, I don't believe you have to address that issue.
If you are going to try to get a loan for the property, you have that issue as well, but more than likely will not be able to obtain a loan unless the legal requirement is fulfilled. You can have what is called a Legal Non-Conforming property, which means it is legal but zoning is out of code (in Chicago, many areas have been rezoned R-1 SFH yet can still be a multi family property). For the most part, you can get financing for that. If you have an Conforming property that is illegal - you are more than likely going to have a problem and need to do exactly what you proposed above in order to get financing.
@Jeff Dulla Thanks for the feedback. Most of the basements have 2 exits, windows, and some even have great ceiling height. Sounds like they would be legal non-conforming.
There is one more wrinkle. My understanding is that I can get approved for 3-unit zoning by adding an electrical meter and heating unit and bathroom to the basement, before any drywall or other construction. Then by adding a basement unit, it is legal and conforming, but does not have permits. This should be ok for financing, but does this further limit the exposure risk.
Also, if the basement is part of the 1st floor unit, in this case it would seem to be no different than a finished basement at a SFH. And of course there is no zoning issue.