What to do about "off the books" basement units

[Anders R.]

I am currently shopping for a multi-family rental in Brooklyn and Queens, NY.  This will be my first investment property.  I plan to do a house hack.

I regularly tour properties that are listed as a "legal 2 family" but which also have a third basement unit not mentioned in the listing description.  On one hand, this makes sense, since that third unit is needed to make the (very expensive) property cashflow.  However, let's say I go ahead and rent out one of these basement units.  What type of liability or legal issues may I be setting myself up for?  Would a tenant in such a unit be covered by my umbrella insurance policy?  (Eg. let's say they sue me for whatever reason, or let's say they cause damage to the property.) What about tax/accounting considerations?  Other legal concerns?

Bottom line question:  Are MFH with "unofficial basement units" something I want to get myself mixed up in?

Thanks in advance for any insights!

[Jonathan Greene]

In many areas, as the owner, you can live in the basement unit and rent the "legal" units, but there could be some restrictions on having a stove or kitchen sink and you want to make sure the full bathroom has been permitted as a basement bathroom. Many people in NY and NJ rent the basement unit and no one says anything, but when they do and that income is taken away, it's a big problem because once the town knows, you aren't renting it again and then what you have to do is rent the basement unit with the first-floor unit, which won't net you the same, but more than nothing.