Insuring an unpermitted ADU

[Emily Davis]

The Problem: Last year I purchased my first rental property. It was a foreclosure (basically one of the last to clear before the pandemic) and I was very excited that it had an awesome mother-in-law suite in the back yard that included a kitchen and bathroom. Here's the problem, while the unit is in good condition, turns out it never had any permits pulled on it. It has been there since the 90's so it's unlikely anyone is rolling by to make me take it down, and I have been told by a contractor that it's also unlikely it could officially be brought up to code because it is too close to the property line. There is also some pretty unconventional plumbing. Safe and functional, but for sure not to code. I want to AirBNB it to travel professionals, mostly nurses and the like. The updates are almost done, and I'm looking for advice on how to proceed.

The Questions: I paid cash for it and need to put financing on it to pull my money out.I know they most likely won't consider the ADU in the value, but will I run into issues getting financing on the main house? Also, what about insurance?I want to make sure I don't put myself at undue risk so do you have any advice for how to protect myself and my investment? What would you guys do in my situation. I am in NC.