House hacking an unpermitted room addition?

Question

I am new to the forums and this is my first post. I purchased my first home in San Diego, CA near San Diego State University in September of 2015. It is a home built in the 1940's and there is an unpermitted room with a separate entrance under the house.  Before I moved in, the mother of the owner was living in this unit. It is only around 300 square feet, but there is a kitchen, a bathroom, a bedroom, and a small living room. I definitely need to put some money into rehabbing the space, but once it is complete I don't think I'll have a problem renting it out. My concern is the liability of renting out that unpermitted space. The inspector said the ceilings are too low and the windows are not fire safe. Should I put the money into getting the space updated and rent it out to a tenant, another option is to rent it on Air BnB or something similar, or I can convert the space into something different all together (man cave, media room, or storage)? I would greatly appreciate any feedback!

Beth Collins · Answer

There are companies that can inspect the addition and tell you exactly how much about it is out of code. I know of at least one that can tell you what it would cost to get it permitted, if that's what you want to do. I believe they handle the work as well as getting the permit. If you're interested, I can get you the name and contact info.

Patrick Parry · Answer

@David West You will definitely want to disclose that the area is not permitted to any would be renter.

Max T. · Answer

Yes you can have problems renting an unpermitted space.

The better question is, will you have problems living in the unpermitted space and renting out the rest of the house?

Justin R. · Answer

@David West Tough call.  As you probably know, it's VERY common for people to rent out unpermitted units, and it's rare indeed to hear of any problems.  I do recall one big problem locally (death and lawsuit, IIRC) back in maybe 2007, but don't recall the details.

Personally, I don't have a problem doing it so long as the unit isn't a death trap - I appreciate that building codes are (mostly) valuable and established for a reason.  If it's as much to code as the rest of the building (or can be made such), I would rent it out.

The issue is a little more nuanced than just landlords trying to make money.  Here's an interesting write up from LA:

http://m.la.curbed.com/archives/2015/06/los_angeles_wants_to_legalize_hundreds_of_illegal_apartments.php

Patrick L. · Answer

@David West My first stop would be zoning to see if it's even within the zoning regulations to have multiple units at the property.   It doesn't matter if all of the work was top notch if zoning will not allow it.

David West · Answer

This is exactly why I made my bigger pockets profile and exactly why I posted this topic. That is great advice Max that I didn't even consider. Unfortunately living in the addition is not an option for me. I have a wife and 2 daughters under 2 years old so that isn't in the cards for us. Now that you mention that I will keep an eye out for those opportunities in the future. Have a great weekend!

David West · Answer

Thanks for all the helpful feedback. I really appreciate all of the input. For now I think I'll take a combination of advice from all of you. First I'll find out what actually makes the space not up to code, then I'll find out if I can get it up to code. If not I will weigh the pros and cons and see if the juice is worth the squeeze. If I decide to roll the dice and rent it I will make sure I screen tenants well to make sure only one person is down there,   I will disclose the necessary info, and I'll make sure the apartment is as safe as possible. Best of luck to all of you and thanks for all the responses.

Dan H. · Answer

I do not know if low ceilings present any hazard.

The Windows is an egress issue.  When I replace windows in units I often have to lower the window sill to be compliant to current code.  So the current code is to make it easier to exit in case of fire, etc.

So how are the current Windows?  Are they original to the 1940s?  If so they are ready to be upgraded and can be brought up to code when replaced (by lowering the sill and ensuring bedroom windows are big enough).

If the unpermitted area is as safe as if it were permitted I would have little issue renting it out.

Good luck

Kevin Fox · Answer

This was my initial reaction as well, but I believe he is seeking advice on how to approach the issue post owner-occupancy. If that is the case, here is what I'd say:

As others have mentioned, there is certainly no shortage of investors who have very little, if any, issues renting out unpermitted units.  The reality is that 99.9% of cases do not end up presenting any major issues.  If you happen to find yourself in that .1% of significantly problematic cases, though, you are probably going to want to call a great lawyer and start praying to the REI gods.

With that said, I am sure you are well aware of the fact that real estate (and most other) investing is about strategically assessing risk and reward. So, I would recommend you gather all the info you'll need to decide if the potential benefits outweigh the liabilities that come with it.

If it's not an area you are particularly informed on; I would recommend you consider consulting with someone well versed in codes/permitting (inspector, civil engineer, etc), reviewing the legal implications of their findings with an experienced RE attorney, and getting bids/quotes from your contractor to correct each.

With that, you just have to decide which area's are worth addressing and which are not. Everyone has a different tolerance for risk, so you'll need to do some soul searching and find the degree of liability you are willing/able to assume without losing (too much) sleep.

When in doubt, @Justin R. 's "no-death-trap" approach is a good place to start for even the least risk averse investors.

House hacking an unpermitted room addition?

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