Are we paying too much for a house hack?

[Nilusha Jayasinghe]

Hey all. My husband and are under contract on a great 2 flat with illegal basement unit off of Logan Blvd in a desirable location in Logan Square with a lot of rental demand. We got it for $635k, thinking we'd be able to rent out 2 of the units (including basement) and live in one. However, the more we thought about it, the more we realized we do not have the risk tolerance to rent out the illegal basement unit and would rather make it legal. However, that requires us to dig down the basement floor to meet the ceiling height requirement (it's got the egresses and 2 exits already), and I think that can easily cost us $100-120k. So all in, including some priority repairs we'd want to do aside from the basement, we're looking at about $750k on this house. 

We make $205k combined. After renting out the finished basement and one of the main units, we'd be paying a very comfortable amount for our part of the mortgage, and upon moveout we'd be breaking even with PITI + maintenance, capex, vacancy which is what we wanted to achieve. However, we're having doubts because:

1. we wouldn't be able to afford the PITI on our own for longer for >6 months without the help of rents, so we're depending on the house hack to be able to afford this house, but not sure if that's a bad thing or not and

2. not sure if this house is too much house for us financially and we're in over our heads about what we can afford.

We've been super excited about this place until we realized the issue with the illegal basement and now we're overwhelmed with the thought of potentially not even moving forward with the house. We really want to make it work, but don't want to financially screw up. Are we overthinking and this is actually a sensible deal for us, or would you say no?

Also, any insights on how hard it is to get a zoning change approved to make this a legal 3 flat? It's zoned as RS3 and I believe we'd need it to be RT4 if I understand correctly. And, I looked and we're not within the limits of the ADU pilot program unfortunately.

Thanks for all the help!