Legal 2 with an illegal basement apartment - Chicago

[Kavan Kucko]

I am looking at a property that is a legal 2-unit apartment with an illegal basement in Chicago. I ran the numbers and it looks like a good deal, even without including the income from the basement (~$500/mo positive cash flow when trying to overestimate costs). So I don't need the income from the basement, and I'm not really interested in renting an illegal basement, but I'd much prefer not to evict the basement tenants. The two guys living down there have been living there a long time; they might have even previously owned the house. 

I am not concerned about the city finding out and having to pay a fine, and then having to evict under those circumstances since there's cash flow without the basement rent. My concern is that of larger liability - think fire or something like that. I'm not sure exactly what makes the apartment illegal, it has a legal exit (and is small enough that I think it only needs one), the windows might be too small and the ceiling might be too low.  

I think I may purchase the building, rent to the two guys in the basement as long as they'd like to stay, and if/when they leave, either look into making the unit legal, or quit renting it. But I worry even that may be exposing me to too much risk.

Just wondering what people's thoughts are on the liability vs kicking out long term tenants.

Thanks

[Prashanth Mahakali]

@Kavan Kucko

If there is a life threatening situation in the building, the fact that you have people living in the basement unit will affect you as the owner.

Best case scenario: you buy the building, evict or pay the basement tenants out, apply for a zoning change to add a legal basement unit, apply for building permit to do the work, pass inspections and rent out the basement unit as a legal dwelling unit. While doing the repairs to the legalize the basement unit, you may have to do other work in the building like upgrading electrical and water service etc. So, this is the most expensive and legally sound scenario.

Worst case scenario: you buy the building as-is and continue to collect rent. A tenant calls the city on you. The city will cite you for building violations and force you to deconvert the basement unit and restore it to an open basement. If there is a fire, not only will you get a building violation notice, you could face civil suit for an illegal unit. Unless you own the building under a LLC and in some cases, they will find a way to come after your personal assets. So make sure you have more than adequate insurance.

Realistic scenario; buy the building, evict the basement tenants and keep it as a vacant basement unit. If you have the money, remove all the partitions and keep it as an open basement. Do nothing else.

The question really is about your risk tolerance. The fact that you posted about this tells me your risk tolerance may be in line with the realistic scenario. That’s what I would do.