All Forum Posts by: Nilusha Jayasinghe

Thanks all. Agree that my agent should have been more clear about this. I'll think about getting a different agent for the next deal if there is one, but since I'm in the attorney review period for this deal now, time is tight for me to try to get info for my questions above so that I can make an informed decision. I was figuring I'd post here to tap into you all's knowledge while I wait to talk to an attorney next week, so any info would be much appreciated. 

@Chris Seveney that was one of my questions, was if I'd actually be liable if it was in a city-approved Airbnb, or a duplex down where the tenants signed off on the lease agreeing that it wouldn't be living space, just rec space. Any thoughts on if those caveats might protect me in this instance? I don't want to pass up on this place because I do really like it, unless there are true liabilities involved with these ideas.

Thanks again!!

Hey all, I'm under contract for a legal 2 flat + illegal garden unit in Logan Square which we want to house hack and then maybe rent out whatever space can be rented out if we move out. The plan is to rent out the top unit to a long term tenant and for us to live in the middle unit until we move out (if we ever do). We're able to afford the place as a 2 flat, but still pondering legal options for monetizing the garden unit, if any exist. The garden unit is nice, finished, has a kitchen, and 2 bedrooms+1 bathroom, 2 egresses, stairs connecting it to the unit above as well as an exit to the outside but ceiling height is 6'5". The zoning is RS3, so we'd have to wait til ADUs are allowed city-wide + dig down to meet the ceiling height requirement if we want to make it a third legal unit which is not something that financially makes sense right now.  

One idea while we live in the unit above, is to make the garden unit an Airbnb. The Department of Buildings said that if we state in the application that the Airbnb is part of our living space and not a separate space, then it'll be approved. But, I wonder if being an city-approved Airbnb host with a legit registration # is enough grounds to stand on legally if an Airbnb client reports/sues me because of, I don't know, a medical injury because of hitting their head on the short ceiling (even if I disclose info about the ceiling upfront on the listing). Any thoughts on this?

And let's say we move out of the middle unit some time down the line. The ideal scenario then is to rent out the middle unit + garden unit together  as a duplex down. My thinking is that since the basement is an illegal unit, we'd put in the lease that the garden can be used for rec space/gym/office space but not as bedrooms, no one should live there/sleep there. But I don't know if that verbiage is enough to protect me in the event of a lawsuit for example if there's a fire down there and someone that is in fact sleeping down there gets hurt. I also don't know if there's a specific process we have to go through with the city for it to be recognized as a duplex down.

Basically, I just don't know if the status as an illegal garden unit (the lack of ceiling height and correct zoning) prevents me legally from using the space for either of these ideas and legally, or if it's just dead space. I know people all over the city use illegal units for all sorts of things, but my goal is to maximize profits while ensuring I'm doing things legally and protecting myself from liability. Anyone have any thoughts on these questions above? If no, what next steps would you advise for me to get the legit info I need- hire a lawyer or call the City's Zoning Dept?

Thanks in advance!

@John Warren it's an illegal unit unfortunately. And you point out an important detail about long-term plans- yes we are looking at this as a buy and hold hopefully for decades to come, where we'd do everything you said: contesting taxes, refinancing when possible, raise rents when appropriate. So I think it seems like a good purchase even if it cashflows negative for a while at the start.

@theresa I agree.. the more I think about it, the more skeptical I get that even if the Dept of Buildings approve it as an Airbnb, if that's enough grounds to stand on legally if an Airbnb client reports/sues me because of, I don't know, a medical injury because of hitting their head on the short ceiling (even if I disclose info about the ceiling upfront on the listing).

@Marcus R. Yeah we've thought of that too. But going off of what I said to @Theresa, I think we're having all these doubts about being able to use this space for anything at all without liabilities since it's an illegal unit. Our plan just yesterday was to rent it out together with the floor above it as a duplex down (once we move out). But I don't know if 1. there's a specific process we have to go through with the city for it to be recognized as a duplex down and 2. we plan to say in the listing that the tenants cannot use the basement as living space, just as rec space/office/etc, but I don't know if that's enough to cover me in the event of a lawsuit for example that there's a fire down there and someone sleeping down there gets hurt. Basically, I just don't know if the status as an illegal garden unit (the lack of ceiling height and zoning allowance) prevents me legally from using the space for anything at all. 

I know people all over the city use illegal units for all sorts of things, but my goal is to maximize profits while ensuring I'm doing things legally. Anyone have any thoughts on these questions above?

Thanks everyone for your input. We've decided that it's just not worth it to dig the basement down due to opportunity cost, the legal hoops we have to jump through, and the logistical headaches you all have pointed out. So we'll just duplex unit 1 down into the basement and keep it as the legal 2 unit that it is. After including the upstairs (unit 2) rent, that puts our part of the mortgage at $3000/month which we can comfortably afford. 

We spoke with the Dept of Buildings today and they said that the basement would also qualify as an Airbnb if we decide to go that route while we live in the floor above it, and that they don't care about the ceiling height. So that's an option we'll likely explore just to maximize the building's potential/our income. But if that doesn't work out, we're okay with just living in the duplex down unit and renting out unit 2. 

As for finances after we move out, we realized that the rent roll for units 1 and 2 is $5900 while the rent roll with 3 separate units if we were to make it a legal 3 unit building, is $6300. So that's not a big enough difference in our eyes, and the opportunity cost of the 6-figure cost to rehab the basement is not worth the returns. So again, looks like keeping it as a 2 flat is the way to go.

Anyways, thank you for all your thoughts and let me know if there's any further feedback!

True, thank you! @Paul De Luca

Thank you @Paul De Luca for your thoughts. I think we unfortunately didn't realize the risks that come with renting out an illegal unit until now, but if we move on from this deal then we'll know to only seek legal 3 flats in the future. But curious, financially do you think this would be a mistake/bad move to take on a $750k home with the income that we earn? And to only be able to afford the entire PITI on our own for 6 months or so, and to need the help of rents beyond that (to depend on the house hack to afford the house)? And we weren't looking to cash flow upon move out in this housing market, we just wanted a reasonable payment (PITI-rents) while we live there and for it to break even if we move out.

I think we really want to make it work if possible, but if it's a huge glaring mistake that we're just not seeing but you all are, then we might unfortunately need to move on.

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!

For property owners with out-of-state investments, is it necessary to keep all receipts and invoices for write-offs during tax season, even smaller jobs performed by the PM's handyman? I recently had our PM buy and install new smoke alarms. In the portal (they're using Buildium) we have a breakdown of the labor and smoke alarm costs, but there are no receipts attached. For context, we had a plumber come recently and this expense did result in a receipt uploaded to the portal. For minor maintenance like buying and installing smoke alarms with the PM's handyman, is it necessary for me to have copies of these receipts when tax season comes around? And is it a reasonable thing to ask for from a PM?

Hoping to get your opinion on me and my husband's first potential investment property. For reference, we don't have kids (maybe in the future) and our combined income is a comfortable $200k so we don't need the rental income for our own personal expenses. We have 6 months reserves for the property already.

It's a 3-unit (each unit 2br/1ba) MFH for $650k in a market with high rental demand. Our plan is to live in one unit and rent out the rest, then probably eventually move out and rent out the whole thing, and to hold long-term. With 5% down and 4% closing at 6.75% FHA interest rate and accounting for PMI, the PITI is ~$5461.Currently each unit would rent for $1600, so as it stands this listing does not make sense.

BUT, the reason I am giving it another look is because the property does have a well-maintained unfinished basement with separate exit and plumbing in place to add another bathroom. So we could convert the basement into a separate 2br/1ba unit, add in-unit laundry to each unit, add central air/heat, and make minor cosmetic upgrades which we're estimating would cost another $100-120k. After all that, the rents would come out to be $2100 x 3 + $1800 for the basement= $8100 total. The total initial investment (down, closing, renovations) = $158.5k. After accounting for utilities/lawn/trash and 10%-5%-5% (of monthly gross rents) for future property management, cap ex, vacancy, and repairs/maintenance, this makes the cash-on-cash return after we move out is still only 2.95% (about $390/mo). But with all the renovations, the property value will have gone up past the $1 mill mark based on comps. 

Given this would be my first investment property, I wanted to ask those more experienced if this is obviously a bad deal or if it's something worth pursuing. I'm nervous that the main feature of this deal is appreciation/value-add potential and not cash flow (at least not immediately), which to my understanding should be the main factor in deal analysis. Other thoughts going through my mind are how I could just use that renovation money and put it into stocks instead, or buy multiple smaller properties in a cheaper area instead of this one expensive place.

Thanks so much for your input!

Oh okay, definitely makes sense. I was wondering if that should be the approach. Thank you for clarifying.