What to do about possible illegal basement unit in inherited SFH?

[Mark Roselle]

A couple years ago I inherited a single-family bungalow in Chicago. It still had a $100k mortgage on it which I took over and during refinancing the market value came back as $350k, which was nice. The building had 3 renters. Over those two years there were some repairs that needed to be taken care of so I've been breaking even, but I believe there is potential to cash flow.

The basement unit renter said they are leaving in a month or two, and they are paying below market rate. My initial thoughts are I can repaint the walls, replace the trim, add vinyl flooring, repaint the kitchen cabinets, and replace the outdated appliances with newer ones for a nicer, modern look, and I can charge more. The basement unit is 2 bedroom 1 bathroom.

However, after making some quick measurements today, I realized the basement unit is probably an illegal conversion. The ceiling height at the tallest is 6 feet 10 inches, and there is only one exit (though the entire unit may be <700 sq ft so maybe that isn't an issue).

I'm afraid that means the attic unit is an illegal conversion as well. It also has its own kitchen and bathroom but , just like the basement unit, as the owner I am paying for utilities and no renter has a lease, though they've been here for a few years each without issue.

I'm afraid of bringing in a city inspector only to be told I have to tear down the basement and attic units, costing me a ton of money, plus I'd be in the hole over $1000 per month because of no rent. Or be told I have to make a bunch of updates also costing me thousands of dollars I don't have.

What are the community's thoughts on this situation?