What to do with a basement "In-Law" Suite?

[Sean Taylor]

Getting ready to close on a 2 flat brick building in Chicago. I've cranked away on the numbers and they look good enough for the property to just barely float using the 50% rule. (Assuming I only receive income from the two legal units) Profit would be minimal, but since I'm planning on living in the first floor and I love the neighborhood I'm willing to take minimal gains.

To the root of my question. Like nearly every rental unit in Chicago, this property has what at one point was a rented basement. Agents throw around terms like English Basement, In-Law Suite, Garden Unit, but the most fitting name is Illegal Unit. 2-Flats are zoned for occupancy of 2 units, and the basement is not a legal unit. So this poses the question to you Pro's about what to do with the space. I've identified the following ideas:

1) Duplex the first floor unit downstairs
PRO's
-would add two more bedrooms and another full bath, and probably $400-$500/mon rental income.
-would be completely legal, and zero liability solution
CON's
-Would probably cost around $50K-$70k, major permits, time, city zoning/inspectors, headaches
-May be much cheaper and easier ways to earn $400/mon more.

2) Rent space to local artists (remove kitchen)
PRO's
-Unit would not need occupancy permit with no functioning kitchen
-Would be relatively easy to bring in $200-$300/mon for the 1,400sqr ft of space

CON's
-Could still be some city issues if they consider it business space, although much less liability opposed to renting as housing unit
-Collecting rent could be iffy, contracts?, enforcement?

3) Do as 80% of Chicago landlords do and rent the unit
PRO's
-Could earn $700/mon or more
-Little to no renovations needed

CON's
-VERY RISKY
-Major exposure if fire occurs in unit, as insurance would likely not cover property or personal protection
-Enforcement of contract on illegal unit and unpaid rent

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Anyone have any other ideas. Can anyone speak from experience on this? There has to be something I can do with all the great space down in the basement. I checked City code and there is really no way possible to get it rezoned as a legal 3unit. Any ideas would be awesome!