Bonus Units - Can you rent it out?

Question

Hi - I am looking at investing in a true Duplex. The house has a bonus basement unit. Are there concerns with renting out the unit as a 3rd bonus unit?

Anna Laud · Answer

@Allan Wu

Hi Allan!

If this is already a duplex, then it seems you're not dealing with a single family zone, so the difference between 2 units and 3 units seems minimal in legal worries with zoning at least.

Now if this were a single family residence and you had this basement suitable for renting out, it might be considered trying to convert a 'secondary suit' into something the city doesn't want (as far as zoning in concerned).

You might run into adequate HVAC capacity and needing to run additional ductwork (then determining a pro-rata billing set up perhaps) or even an additional unit with separate water meter just the same.

I would probably verify with local zoning authorities as far as any structural changes needed to the façade of the exterior to allow for a separate entrance but that is likely not an issue in most cases.

If this is a duplex hooked up to septic (like some of the older, converted homes in Indy and more rural areas for example) you would need tp verify that your local code supports this conversion of useable square footage as supported by the current septic tank size or install a larger/additional tank.

It sound like there are likely to be some additional expense in conversion of this basement into a third unit, however the additional income may in time offset these as well as the deduction of capital improvements (this is for a pro/CPA to determine what adds value, etc).

Overall, I think it sounds like (at least how I read it!) that the main concerns would be structurally- assuring this is indeed a fully functioning third unit  that complies with any local zoning that would possibly apply.

Hope that helps = )

Michael G. · Answer

I strongly recommend you do not rent the basement as a unit. No matter how much of a livable space it may resemble, if the basement or garden level isn't legal habitable space, you are taking on significant risk renting it. Here are some scenarios that may help you make this decision:

1. Fire caused due to illegal tenancy in basement may void home insurance coverage (i.e. stoves are not permitted in basement)

2. In the event of a fire caused by an illegal tenancy, injuries or death sustained by tenants in your building may result in criminal charges against you.

3. Renting an illegal unit does not offer you the protections a traditional rental would. Your tenant could not pay rent and there would be little you can do about it on an eviction standpoint. They can also report you to the city which may result in fines or civil penalties.

John Mocker · Answer

Allan,

There would be several concerns from an Insurance perspective.   Some companies will write a 2 family but not a 3 family.  Also, if it is not permitted, get it in writing from the agent that the company will accept it.  You do not want to find out at claim time that the company did not know of the 3rd unit.

I did have a company accept a similar situation.  What that company did point out was that the coverage would only replace the permitted units but the basement would be unfinished.  Further, they would only pay the loss of rents on the 2 units not the unpermitted unit.  Other companies may handle those two issues differently so you need to be clear to the agent what the situation is and have them spell out how their policy would respond.

John M Chludzinski · Answer

The full answer to this question depends on the city or town where the property is located - and their zoning rules.  It also depends on the physical characteristics of the basement, as others have pointed out - fire egress, ceiling height, window size, etc. all matter and affect whether the city will allow the occupancy.  For reasons cited above, renting out an illegal (without city approval) unit in the basement with physical limitations, such as poor fire egress, is a fast way to the poor house, when you lose the property to fire, or the jail, if someone is injured or dies.  Don't take that risk for a few hundred dollars a month profit.

Joe Splitrock · Answer

Just to build on this commentary. Basement units often lack egress windows in bedrooms, which are needed for fire escape. If a fire starts and someone is trapped in the basement and dies, it becomes a liability for the landlord. Your insurance can deny the claim due to illegal occupancy.

Bonus Units - Can you rent it out?

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