Should I Add an Illegal Unit in the basement of my Quad?

[Ugochukwu Opara]

What's going on bigger pockets family?

My name is Ugo and I have a question and I would appreciate the input of everyone reading this.

Here is the scenario:

The owner has one property, a 4 unit apartment building (2 bedrooms 1 bath each).

the building was recently renovated.

Rent roll is $3620

The mortgage is $1400

Owner pays water, sewer, trash, electric for common area and laundry room = $250/m

Vacancy(5%) = $181

Management = $289.6 (not being used but bugeted for)

Capx (10%) = $362 (newly renovated so keep that in mind)

Net cash flow $1137.4 (around $284/m per door)

remember that property is being self-managed ($289.6 for management doesn't apply but is being budgeted for)

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With the above in mind, should owner spend $25,000 to add an illegal 2 bedroom unit in the basement?

The owner would occupy the unit and could get a roommate that would pay $350-450/m (all utilities included). The sucky part is that the unit in the basement would be non-conforming since the ceiling height is below 7 ft for Philadelphia. Hence why the owner is occupying it. If the owner moves in then the owner will plan to hang out for 305 years while purchasing other properties to build up the rental portfolio. 

The other option would be to leverage the $25,000 and put it down on a smaller multifamily as an investment property. This is limiting the owner to a purchase price of around $100-$115 and multifamilies in that range will most likely need work so cash investment will be much more than the $25k that owner has. The owner can save about $15,000 a year. 

Let me know if I am missing any information that you need to help with this situation. 

What would you do? What are your thoughts and why?