Legal two flat with rented basement concerning LOC?

Asked by Abigail, Chicago, IL Mon Mar 10, 2008

I am interested in a legal two flat fully rented with a 3rd unit basement also rented and the cashflow is positive. I'm putting 10% down on a 250K property. The day I want to take out a line of credit on that building since the basement is not a legal unit can I count the basement as income when talking to the lender? I assume the bank will take this in to consideration. Also is it best to put down 10% or is 20%? I'm trying to tie up as little money as possible. The most honest of honest people I know manage their two flats in this way. Is this a dependable method?

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Mwass, , Chicago, IL
Tue Mar 11, 2008
if you are the owner of the building you can apply for a certificate of occupancy or let the building department send its inspectors over to look around. provided that (a) the property meets all applicable building/fire/electric/plumbing codes, and permits were pulled for all improvements (as may have been required) the city will certify the apartment as "legal" if any of those things are lacking, the seller is at risk for fines and compliance.

the point i am trying to make is that most basement and attic units are "illegal" for a reason - namely that some corner was cut and some code not met. it is inferior housing. no offense intended.
2 votes
C Tann-Starr, , 11354
Tue Mar 11, 2008
Hi Abigail,

All basement apartments are not created equal and some are up to code and habitable while others are not. Research is the key. Check with the Buildings Dept where you live to help you determine your best options. Some people have been very successful in their certificate of occupancy applications (e.g. from doing a few cosmetics to full blown renovations). I know engineer reports can be very expensive, so start with gathering all the free PDFs and guides the Dept of Buildings has to offer you. If it is a matter of having a licensed professional file the plans and sign off on it, it may be well worth it to get the job done right the first time around and enjoy your tax write offs for the home improvement upgrades. At least when you do eventually rent it out, you wont have to worry about being fined by the inspectors. If you eventually decide to sell the property down the road, your certificate of occupancy for your multifamily unit will add $$$ of value to the deal. The basement apartment conversion is not impossible, it just needs to conform to the codes of your jusridiction.

Wishing you the best with your project.

Regards, C.
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3 votes
Abigail, Home Buyer, Chicago, IL
Tue Mar 11, 2008
Not offended in the least. Just trying to get some straight information. Much appreciated.

It was just hard more me to believe how much illegal housing could be out there based on the information you gave me. Thanks again
2 votes
Mwass, , Chicago, IL
Tue Mar 11, 2008
you still have the same problems as exist in the other, similar question that you posed about divided units. the city does require zoning certificates and your seller will only be able to produce a 2-unit certification. if you intend to use the rent from three renters, AND you state this in your loan application AND the bank finds out (now or later) that you are using rent from an illegal apartment, you now have risks and potential liabilities for (a) city of chicago code violations, (b) tenant lawsuits, and (c) mortgage fraud.

the most "honest of honest" people you know? they are collecting rent from people living in unsafe and illegal apartments. people who do this are slumlords....
2 votes
C Tann-Starr, , 11354
Mon Mar 10, 2008
Hi Abigail,

This information was collected from a press release at

Departments of Buildings, Zoning Task Force Targets Illegal Conversions
Inspectors Cite Owners of Illegal Apartment Units

An illegal conversion occurs when a building owner constructs additional living space that is not allowed by building or zoning code.

On February 23-25, 2005 a task force of City building and zoning inspectors visited 57 locations in the Archer Heights, Brighton Park and West Lawn neighborhoods, and wrote scores of citations for code violations.

"When landlords illegally convert their single-family homes into multiple dwelling units, they often cause unsafe situations," said Department of Buildings Commissioner Stan Kaderbek. "Our joint task force took immediate action against a serious problem."

The most commonly cited building code violations included: no emergency exits; no ventilation equipment for kitchens or bathrooms in basement and attic apartments; inadequate heating systems for attic apartments; and inadequate light and ventilation for basement apartments.

FYI: Carbon monoxide (CO) is a odorless, colorless gas produced by burning fossel fuels (Fossil fuels shall include natural gas, coal, kerosene, oil, propane and wood etc.) Exposure to lower levels of CO over several hours can be just as dangerous as exposure to higher levels for a few minutes.

Those most at risk are:
1. Children.
2. Elderly.
3. People with lung or heart disease.
4. Pregnant women.

Signs and symptoms of CO poisoning include:
1. Headache.
2. Fatigue.
3. Sleepiness.
4. Weakness.
5. Nausea, Vomiting.
6. Dizziness, Confusion.
7. Trouble breathing.

In NYC, an adult family member may stay in a basement bedroom without penalty, but it is not recommended for a guest (e.g. tenant or anyone else), so I am assuming there is a personal liability / insurance issue in addition to the possible health hazzards. Regards, C.
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1 vote
Abigail, Home Buyer, Chicago, IL
Tue Mar 11, 2008
Ok, Ok, Ok. You two gave me some great information to bring to my Agents. Thanks. I can't help but make comment of your slumlord comment though. Many of the basement 3rd units in 2 flats I have seen people living in have been great apartments. I live in one. Good ceiling height, two exits, proper ventilation. Can I assume this is illegal as well? Seems totally up to code. How hard is it to get a building rezoned for 3 units? If the illegal apartment is up to code in every aspect is the only concern of the city properly collected taxes and population density control?
0 votes
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