Chicago two flat garden units, what are you seeing on appraisals and rent?

Question

The garden unit is the most underrated space in a Chicago two flat. For anyone outside Chicago, a two flat is what most of the country calls a duplex, and the garden unit is the lower level apartment that sits partly below grade.

Here is what I keep running into. The lower unit gets treated two different ways. Sometimes it shows up as its own unit with its own market rent on the appraisal. Sometimes it shows up as finished square footage and that rent never lands on the rent schedule. Those two outcomes change what a buyer can borrow.

So I want to hear from people who bought or refinanced one recently. What did your appraisal actually do with the garden unit, and what is it renting for next to the unit above it?

Hossein Sharifi · Answer

The split almost always comes down to one thing: is the garden unit legal? If the building is zoned and permitted as a 3-unit, the appraiser can treat it as a unit with its own market rent on the 1025 rent schedule. If records show a 2-unit, Fannie/Freddie guidelines push the appraiser to call it below-grade finished area. Below-grade space doesn't count toward GLA, and that rent never makes it onto the schedule, no matter how long it's been rented.

For buyers that means checking zoning, permit history and the assessor record before you underwrite garden rent. If it isn't legal, I'd treat the garden rent as upside rather than part of the base case, and assume the lender won't count it. Chicago's ADU ordinance has opened a legal path in some areas, but it involves permits and real costs, so it's a project, not a paperwork fix.

Curious what others have seen on actual rent spreads between the garden and the unit above.

Henry Lazerow · Answer

The appriser will not count it as a legal unit if it is not zoned as a legal 3. But I have almost always seen the appraisals come in higher when the building has a nicely done illegal unit, just like when you list a property it will sell higher if it has a nicely done illegal unit. I assume they count it as finished space but never look that closely. To give an example I just brokered a legal 2 unit with a 3rd in Avondale at $880k when most 2 units of similar finishes were priced much lower and it still appraised out just fine as a legal 2 unit even though 880k is really closer to 3 unit comps.

Jonathan Klemm · Answer

Hey @Dan Nelson - Are these Chicago garden units it's legal? Or are most of them non-conforming?

I'd assume that if they were legal and on the zoning cert, you could challenge the appraisal to get the rent added properly. Is it happening often where they aren't letting you use rents from a legal garden unit? That would surprise me.

Noah Wright · Answer

Asking for real rent numbers instead of theory is the right way to settle this, because it really does go deal by deal. Where the split bites on a DSCR loan is the ratio. Most DSCR lenders size the loan off the appraiser's market rent column, and many use the lower of that and the actual lease. So a nicely finished garden that lands as finished space can lift the value while the ratio is still worked out on two rents. Higher value and a thinner ratio can end with the ratio capping the loan before the LTV does, which surprises people who were counting on the appraisal. On the ones you've seen, do the actual garden leases sit above or below what the appraiser wrote down as market rent?

Mike Fisher · Answer

Good thread. One thing from the management side nobody has hit yet: even when the garden unit is legal and the rent lands on the appraisal, it usually does not operate like the unit above it. Water is the big one. A backed up sewer or a failed sump pump hits the garden first, so I would budget a separate reserve for it and check for a backflow valve and the sump age before closing. Garden units can also turn over more often, so I would carry a higher vacancy number on that unit alone instead of one blended rate for the building. Then the deal still works on the days the garden is empty or drying out.

Amit Patel · Answer

Good move. A general CPA and an estate attorney are fine for some things, but investors need people who live in this world. I can’t recommend names publicly, but here’s how I’d screen each one:

CPA

-Ask what percentage of their clients are investors. You want a big number.

-Ask how they’d approach cost segregation, depreciation, and REPS or STR strategies for your situation. If they don’t bring up planning on their own, keep looking.

Attorney

-Landlord-tenant law and evictions are very local, so you’ll want an attorney licensed where your properties are. That may mean one in Ohio and one in Florida, not Chicago.

-Ask how many evictions they handle a month and whether they review leases and purchase contracts.

Bookkeeper

-Find one who knows real estate charts of accounts and can track each property separately.

-Ask which property management or accounting software they work in, and make sure it matches yours.

Underwriter

-Ask for a sample underwriting package and test it against a deal you already know well.

Jennie Berger · Answer

This is odd @Henry Lazerow. Though, I'm not entirely surprised because 1. It's Avondale and 2. Supply is still constrained in Chicago, especially on the North and Northwest sides of the city. Congratulations though!

Divin Kanyama · Answer

That inconsistency is real, @Dan Nelson . Appraisers usually look at whether the garden unit is legally recognized and supported by zoning, permits, property records, and comparable sales—not just whether it is finished and collecting rent.

If it is treated as a legal unit, the rent may appear on the appraisal. If not, it may be counted only as finished lower-level space, which can materially affect financing. I would confirm the legal unit count and ask the lender how it handles garden units before relying on that income.

Recent examples would be helpful, especially with the neighborhood, legal status, bedroom count, and rent compared with the unit above. Two similar-looking garden units can be treated very differently. Just a practical investor perspective.

Crystal Smith · Answer

Our experience regarding appraisals is as long as the garden unit is legal the appraiser will count it. We even had an incident where the unit did not have a window large enough for first responders so we increased the window size and wallah the appraisal came in higher.

Chicago two flat garden units, what are you seeing on appraisals and rent?

Chicago two flat garden units, what are you seeing on appraisals and rent?

Most Popular Reply

9 Replies