Whenever I’m talking to people about investing in Chicago real estate, I get asked the same question: what’s the single-most-important source of information? And my answer is always the same: City Hall. I advise people to follow what’s going on at City Hall as much as they read Crain’s or scour Redfin.
This is especially important when you are trying to plan your investment strategy around new trends. New trends always mean new regulations, and this is especially true when it comes to making an investment in Chicago Airbnb properties. The aldermen of Chicago have been agitating to take on short-term rentals for a long time, and for a number of reasons, they’ve been successful. Citizens have complained, and politicians listened. In Chicago, it’s all about who you know.
Airbnb has a lot of positives for investors, but it might not be the right move. Things have changed in Chicago for short-term rental aficionados, and some fear that the market might be drying up. Of course, there are still great investment opportunities in Chicago to complement or replace your Airbnb plans—you just have to know where to look.
What’s Changed About the Chicago Airbnb Investment Climate?
It’s easy to understand why real-estate investors have been excited about Airbnb options; it’s passive income that can potentially generate a lot of money, and you don’t really have to worry about long-term, problematic tenants. And, it’s also easy to understand why these have been very popular in Chicago: it’s a tourism paradise.
That might surprise people who think of Chicago’s brutally cold winters (they build character, I tell myself every year through gritted teeth). But Chicago in the summer is a delight. With miles of lakeshore, some of the world’s best museums, an incredible food scene, and so much more, Chicago has experienced a tourism resurgence.
The numbers back that up. In 2019, Chicago was the third-most visited city in the United States, behind only New York and Orlando. And not all of those people could afford to stay downtown, of course, with Loop prices.
That helped lead to a short-term rental boom. More adventurous tourists loved the chance to stay in cool neighborhoods like Pilsen, Logan Square, Wicker Park, and more. Near the El and in the heart of incredible food and culture scenes, the neighborhood Airbnb business was a huge hit.
That’s changed. And a lot has changed with it.
How the Pandemic Changed the Chicago Airbnb Market
The pandemic put an immediate crimp into all of that. Obviously, tourism fell off a cliff, and Airbnb owners started to have to change their plans. They could cater to easy getaways, short vacations, even glorified staycations. But while people have been traveling this year, they have mostly been going out of the cities.
With restaurants at less-than-full-steam-ahead, museums limiting the number of guests, music venues shuttered, and Navy Pier closed, most tourists stayed away.
That didn’t mean that Airbnb owners were suddenly off the hook; it means they had to shift. They started to cater to people looking for one-night stays. And while that kept people above water, it also caught the eyes of City Hall. And they didn’t like what they saw.
How Airbnb Regulations Have Changed in Chicago
In 2016 and 2017, City Council and then-Mayor Rahm Emanuel tightened some loopholes regarding taxation of short-term rentals. It was pretty much the Wild West before that, and a lot of people made a good amount of money. People were still making a lot of money even with those regulations though. It just made the scene a little different.
These regulations are a lot more targeted. And they are targeted at one-night stays.
See, Airbnbs in Chicago (and, to be fair, elsewhere) became “party homes”. Groups would rent them out to avoid social distancing restrictions and have parties. Neighbors didn’t like that at all, and the City, tasked with protecting public health, liked it even less.
So in September of 2020, the City banned one-night stays. Violators could face fees between $5,000 and $10,000 dollars. That’s enough to wreck a whole year’s worth of profit margin.
You can say that these laws are unfair and draconian, punishing small business owners as well as just people passing through, but those are the laws. And they’ve impacted a business model that had already been battered by different influences.
Other Changes in the Chicago Airbnb Investment Market
The pandemic isn’t the only thing that’s been hurting the short-term rental market, though it has heightened pre-existing issues. Owners are now being pressured from a lot of different directions.
Another aspect of the new regulations is that neighborhoods have way more say in approving short-term rental opportunities in their area. Already, precincts that are low-density (generally, Zoning Districts 1, 2, and 3) can petition to keep STRs out of precincts. They only need 25% of registered voters to approve a ban.
Now all residential zoning districts, up to 5, can do the same. This gives a lot of power to precincts, which is really how politics works in Chicago. CItizens get together, give their precinct captain an earful, and they go up to the alderperson. And laws get changed. Remember, it’s about who you know.
So now you only need a minority of voters in any given area to come together to ban short term rentals. But citizen power isn’t the only pressure. The Chicago short-term rental market has also come to be pretty dominated by venture capital, hurting the mom-and-pop owners.
Now, to be clear, the regulations passed also crack down a little harder on the huge players. People with fewer than 1,000 units don’t have to pay as much for fees and regulations. And there is some evidence that neighborhoods are way more open to approving small owners.
So it isn’t like Airbnb investments in Chicago are dead. They just are a lot harder to operate. And they are less likely to be a good sole source of income.
What does that leave? Well, it leaves the old-fashioned fix-and-flip.
Expanding Your Investment Portfolio in Chicago
Fix-and-flip might not render as frequent results as a Chicago Airbnb investment, but the method is generally safer. This is an established business. Regulations and rules are in place. Odds are, there may not be any more dramatic changes for a long time. That’s peace of mind—for me, at least.
Another way I have found peace of mind is by being an independently owned and operated HomeVestors® franchisee. For me, it’s the best way to go about flipping rehabbed houses in Chicago. I get great leads and have a ton of resources.
Even better, I’m in a great network of experienced local real estate investors. I get to talk to incredible people, professionals who really know the business model and who know the ins and outs of Chicago. If you are starting out, or trying to shift your business model in the wake of Airbnb regulations, finding a real estate mentor in Chicago could be crucial. And becoming a franchisee is a good way to get to know people.
Airbnb might not be your best bet for your business, but that doesn’t mean you have to stop. The HomeVestors® franchise also puts you in a network with people who are good to know. And in Chicago, as we know, that goes a long way. If you’re interested in finding great opportunities and getting to know the right people in real estate investing, request information about becoming a franchisee today.
Each franchise office is independently owned and operated.