Rental Arbitrage in Chicago | What to Know!

What is Rental Arbitrage?

Rental Arbitrage is a business model that focuses on leveraging other people’s properties through sub-lease agreements and renting those properties on platforms like Airbnb, VRBO, or HomeAway. In essence, rental arbitrage hosts will rent properties from the long-term rental market and resell them on the short term marketplace.

Rental Arbitrage can be carried out in multifamily houses, duplexes, or triplexes. You can easily use the money from your short-term rental to pay off your lease and also profit some more.

Imagine you rent an apartment for $2,000 per month. If you sublet that same apartment on Airbnb for the month at $150 per day, you could pay off your rent in just under two weeks. Once you’ve paid off the rent, the rest of the month is pure profit. With the possibility of $2,000 in profit each month in our example, after subtracting potential maintenance and overhead charges, short-term rental arbitrage allows you to grow your income and save without owning property.

Of course, that’s an oversimplification. There are expenses to running short-term rentals. Seems too good to be true? Yes and no. Airbnb rental arbitrage is a tactic that can work well in some markets. It’s a great way many investors use cheap rental properties to make them more money. However, there’s a lot of due diligence required on your part before jumping in with both feet.

Why Chicago?

Chicago, the "Windy City" as it is often called, lies along the shores of Lake Michigan. Known for its vibrant arts scene, numerous cultural attractions, excellent shopping, and interesting architecture, this city attracts visitors from the US and around the globe.

Chicago enjoys a worldwide reputation as a focal point of 20th-century architecture and art, with architects such as Louis Sullivan and Frank Lloyd Wright, and artists like Picasso, Mirõ, Dubuffet, and Chagall leaving their mark.

The city also has much to offer in the sporting sphere, too, with the Chicago Bears in American football, the Chicago White Sox and Cubs in baseball, and the Chicago Bulls in basketball.

The beautiful beaches stretch along the waterfront, attracting throngs of sun-seekers in the summer.

Deciding when to visit Chicago may depend on a guest's interests, particularly if they are coming for sports or cultural events, but spring until fall is the best time for weather.

The Art Institute of Chicago is a world class museum with hundreds of thousands of artworks. The diverse collection spans thousands of years and includes pieces from a variety of media including painting, prints, photography, sculpture, decorative arts, textiles, architectural drawings and more.

Millennium Park is part of the larger Grant Park, located in downtown Chicago bordered by Michigan Avenue to the west, Columbus Drive to the east, Randolph Street to the north, and Monroe Street to the south. Its centerpiece is a 110-ton sculpture named Cloud Gate, which has a polished, mirror-like stainless steel surface that was inspired by liquid mercury. It reflects the surroundings, including buildings, the sky, and the tourists who walk through its central arch.

Lincoln Park is a six-mile stretch of green space along the edge of Lake Michigan, and Chicago's biggest park. This popular park is home to the lovely Lincoln Park Conservatory and the Lincoln Park Zoo, one of the oldest zoos in the country. Also located here are the Peggy Notebaert Nature Museum, and the Chicago History Museum.

If Lake Michigan has you wondering what sort of aquatic life exists just offshore from downtown Chicago, swing by the Shedd Aquarium. Inside are exhibits that cover aquatic regions of the world, from the Arctic to the Caribbean.

The best sightseeing, shopping, and dining and the most interesting architecture are found in Chicago's city center, and this is where most visitors will want to stay. The city center encompasses the famous Magnificent Mile and areas of the waterfront, which are particularly popular in summer.

What should you know about Rental Arbitrage in Chicago?

If you dive deep into vacation rental property management, you will know that it's important for you to understand the laws in your city, before deciding whether or not to become an Airbnb Host.

Hosting regulations

Renting out your property for a short period in Chicago can fall under different categories, for instance:

• Shared housing unit

• Bed and breakfast

• Vacation rental

• Hotel

For Hosts of all categories the City of Chicago has licensing or registration requirements. Read more about them below.

Shared housing unit registration

The Shared Housing Ordinance introduced by the City of Chicago in 2016 requires Hosts to register their shared housing units with the City in order to list their spaces on home sharing sites like Airbnb. In September 2020, the City approved a reform package which includes the following changes that impact hosting:

• Hosts are required to register their shared housing units and renew directly through the Department of Business Affairs and Consumer Protection’s Shared Housing Registration Portal, instead of on homesharing sites like Airbnb as previously required. A separate registration is necessary for each unique address that is used as a shared housing unit.

• Hosts are required to pay a fee of $125 for each newly approved Shared Housing Registration, as well as approved annual renewals.

• Registration applications that are pending approval or being appealed by the City of Chicago will not be able to continue hosting until they have been approved.

• Hosts of all types of accommodations, not just shared housing units, must include their license number in their listing advertisement.

The City provides additional information about shared housing rules in Chicago, including requirements like occupancy limits, keeping guest records, and minimum length of stays. Penalties for violations of these requirements may result in your registration number being suspended or revoked. You could also be subjected to fines. Please visit the City of Chicago’s website for more information.

To register and/or renew your registration for a shared housing unit, follow these steps:

• Visit BACP’s Shared Housing Registration Portal

• Create an account in the portal, upload a valid form of identification, and update your mailing address

• Click Apply for a Registration Number under the My Applications section on your dashboard and follow the City’s instructions to filling out your information

• Submit your application and wait for BACP to approve your application

• Once approved, pay your application fee of $125 for each approved registration

• Go to your Airbnb host account page

• Click on your listing Policies and rules > Laws and Regulations > Regulations

• Add the number you received by email in the registration number field

• Click Save

Your registration will need to be renewed annually by going through the same process. If you do not renew after your registration has lapsed, you may be subject to fines, penalties, and/or removals. If your registration has been denied by the City, BACP will communicate the outcome of your application and will provide any/all appeal options. You may also visit BACP’s FAQ page or contact BACP for more information.

Shared housing unit operators

If you plan on listing more than one shared housing unit, the City of Chicago considers you a Shared Housing Unit Operator and requires you to obtain a special license. The application process and fees related to the Shared Housing Unit Operator License can be found here.

Vacation rental licensing

The City of Chicago requires a license for a “vacation rental.” Section 4-6-300 of the Municipal Code contains information regarding the licensing process and the duties of a vacation rental licensee.

Vacation rentals may advertise or list their rentals through platforms like Airbnb, but they must register and receive approval from BACP before they can list on intermediary platforms. Hosts are required to post their property’s license number on their listing. Additional details, including fees and process information, are available at the City of Chicago’s Business Licensing Page.

Bed and breakfast licensing

The City of Chicago requires a license for a “bed and breakfast.” Section 4-6-290 of the Municipal Code contains information regarding the licensing process and the duties of a bed and breakfast licensee.

Bed and breakfasts may advertise or list their rentals through platforms like Airbnb, but they must register and receive approval from BACP before they can list on intermediary platforms. Hosts are required to post their property’s license number on their listing. Additional details, including fees and process information, are available at the City of Chicago’s Business Licensing page.

Hotel licensing

The City of Chicago requires a license for a “hotel.” Section 4-6-180 of the Municipal Code contains information regarding the licensing process and the duties of a hotel licensee.

Hotels may advertise or list their rentals through platforms like Airbnb, but they must register and receive approval from BACP before they can list on intermediary platforms. Hosts are required to post their property’s license number on their listing. Additional details, including fees and process information, are available at the City of Chicago’s Business Licensing page.

Zoning ordinance

Some Chicago aldermen are using zoning laws to prohibit the issuance of new vacation rental licenses from certain precincts. Alderman Marty Quinn (13th Ward) and Michael Zalewski (23rd Ward) have been particularly active in this regard.

The Chicago Zoning Ordinance regulates zoning requirements and land use in the City. You should consult the Zoning Ordinance—and the 2016, 2017, and 2020 home sharing amendments to the Municipal Code here—to see if your listing implicates any zoning requirements or use definitions.

Taxes

Chicago imposes a 4.5% Hotel Accommodations Tax, 4% Shared Housing Surcharge, and 2% Domestic Violence Surcharge on the listing price including any cleaning fee for reservations 29 nights and shorter. Airbnb collects and remits these taxes and fees in Chicago. More information is available here.

Cook County also imposes a 1% Hotel Accommodations Tax on the listing price including any cleaning fee for reservations 29 nights and shorter. Airbnb collects and remits this tax in Cook County.

The State of Illinois also imposes certain hotel taxes that may apply to your listing as described in this Illinois Department of Revenue publication. Airbnb collects and remits these taxes in Illinois.

Other rules

It's also important to understand and abide by other contracts or rules that bind you, such as leases, condo board or co-op rules, HOA rules, or rules established by tenant organizations. Please read your lease agreement and check with your landlord if applicable.

Here’s what you need to know about operating a legal Chicago vacation rental:

1. You must submit an Application and License Fee of $500 to the city (that’s an annual fee).

2. If your unit is subject to restrictions by a homeowners association or board of directors, you must attest that the association or board has not adopted bylaws prohibiting the use of your unit as a vacation rental.

3. You must purchase homeowner’s fire, hazard and liability insurance, and general commercial liability insurance with limits of not less than $1,000,000 per occurrence, as mandated by code.

4. Your unit will be inspected by the City of Chicago Department of Buildings. Additional costs might flow from the inspection in the form of mandated renovations, repairs, and associated permitting fees.

5. Taxes are now 10.5% of the gross rental or leasing charge (see the Hotel Accommodations Tax in Section 3-24 of the Municipal Code), up from the previous tax of 8.5%.

6. You’ll have ongoing housekeeping costs, including the maintenance of guest registration records; the provision of soap, towels, linens; and cleaning and sanitizing the vacation rental after each guest departs.

And just in case you were thinking of taking your chances with an unauthorized Chicago vacation rental, please know that being an illegal Airbnb Chicago downtown host could be very costly. MCC § 4-6-300(i)(1) threatens that “[a]ny person who operates the business of vacation rental without first having obtained the required license for such business shall be subject to a fine of not less than $2,500.00 nor more than $3,000.00 for each offense.

Each day that a violation continues shall constitute a separate and distinct offense.” Keep in mind that your listing on a peer-to-peer website like VRBO is convincing evidence of your operation of an illegal vacation rental. And if your neighbors are annoyed by the transient guests, they might bring your illegal business to the attention of city authorities or your condominium or homeowner’s association.