Unfinished basement: To duplex down or turn into a third unit?

Question

I have a two unit brick building in logan square, Chicago that I’m house hacking. I have a soon to be empty 3bd/1ba first floor unit and an unfinished basement that I can either turn into a separate 2 bed one bath basement unit or I can annex it to the first floor unit and add three bedrooms in the basement.

I ran the numbers and I can make more money in both a long term rental and short term rental scenario renting the unit as a duplexed down unit and I would avoid a lot of excess work required to add the separate basement unit as a legal, conforming ADU.

What makes me nervous about duplexing down is having a less diversified income from this house hack.

If the short term rental has a few bad months or if the tenant in the unit stops paying, I have no other income to rely on in the building while im living in it. Thoughts?

Jonathan Klemm · Answer

Yo @Benjamin Sussman - That's a question that hundreds if not thousands of Chicago investors ask themselves.

For me, the answer was neither duplex down nor build out the basement.  I determined the high ROI on my money was going to find another property.

There's no doubt I'll build out or duplex down at some point into, but the speed to the next property is often overlooked and maybe the more important thing to consider.

Mark Ainley · Answer

@Benjamin Sussman If you can make the third unit a legal unit, that is only when it becomes super valuable. When just left as a non conforming unit, the next buyer will always discount it based on risk of someday not being able to use it.  Duplexing down will allow a longer term family to live there, which will make up some of the additional money you made on having a third unit.  The management of a third tenant will either cost you time to self-manage or your bottom line if you hire a PM.

The build out of adding another bath and some rooms will be much less then adding another kitchen, bath, etc..  calculate that when measuring these options too.

Jennie Berger · Answer

IF you are planning to keep this long term, the low hanging fruit (for me) would be to duplex down the 1st floor (via a 'lockable door'), add a bathroom and small kitchen, ensure there is a 'walk-out' staircase from the basement to the exterior of the building, and then rent out the 'garden' unit as an Airbnb short term or mid term, furnished. Though this won't count technically as a legal 3rd unit, you can still rent it out and collect income from it as if it WERE a 3rd unit. This makes sense if you're planning to stay put for a while.

As @Mark Ainley said--if you're planning to sell anytime soon (next few years), your buyers (assuming they are also investors) will appreciate the income producing garden unit but be required to discount their purchase price because it's non conforming / not 'legal'. The benefit of duplexing down is it will be easier for you to get a short term Airbnb permit (STR) from the city, since it's technically your 'primary residence.'

Next, assuming you have already confirmed that you're in an ADU 'pilot' area, I'd check with an architect about the FAR and zoning of your property. Perhaps there is an opportunity down the line to add a coach house over the garage. Then that unit could then become your legal 3rd unit...

Just thinking outside the box. Verify with all necessary parties (obvi) before making a decision. Hope this helps!

Jennie Berger

Brian Moore · Answer

@Benjamin Sussman I question your analysis of the decision to duplex* down vs add an ADU. My experience has been that adding an additional unit is substantially more valuable than adding space to another unit. For example, a new 2BR garden apartment will get you $1500+ in rent (if you go with top finishes you could get $2k depending on location and layout). While duplexing the 3/1 down and making it a 5/2(?) is far less valuable. Maybe you increase your rent by $900 from say $1800 to $2700. The additional unit adds 66% to your revenue vs duplexing down.

Thinking of it another way, if you had the opportunity to buy another unit for free, but you just had to gut rehab it (ie. the new ADU), wouldn’t that be your best investment? Plus, the additional taxes and operating expenses of another unit will be negligible.

It is possible that you analyzed the revenue from STR’s and found that 5-bedrooms are worth double the rent of a 2-bedroom. I don’t operate STR’s but I find that a little hard to believe.

Plus you have identified one of the issues with creating a large unit vs two smaller ones, which is increasing the bigger hit of one vacancy on your revenue stream.

* For those outside of City of Chicago, contrary to the normal definition, the term ‘duplex’ in the city means a unit that spans two floors with an interior staircase. A two-unit building (in the city) is referred to as a two-flat.

Scott Mac · Answer

Are you zoned SFH/Duplex or Triplex.

Knowing that might help you make your decision.

Good Luck!

Bud Gaffney · Answer

Keep us posted on your decision and results.

Bud Gaffney · Answer

Third unit would be GREAT if it passes zoning! Check it out and good luck!

Unfinished basement: To duplex down or turn into a third unit?

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