Is Airbnb Destroying Multifamily Value in Chicago?


Airbnb is blazing a trail across the world - changing the way families, business travelers, and your weekend warriors experience a city. Chicago is no different. Even with the City of Chicago's 62-page ordinance, the market for Airbnb in Chicago continues to grow. 

Their sell? A more "local" feel for young business travelers. For families,  a place to call their own and enjoy in peace - even cook if they want. A communal place that breathes of a "real experience" in the city. And it seems to be working.

But, is it good for the neighborhoods of Chicago? Does it help rents competitive and increase the long-term appreciation of homes? Carl Franzen seems to think so, but with investments and/or homes there comes a number of issues, whether real or superfluous. 

The reason investors/owners are willing to deal with these issues? The money. Here are some of the market numbers in Chicago from 2016-2017:

2 BDR Apartments

Airbnb Rental Data (2016 - 2017)

Fulll-time 2-Bed Rentals: 556

Occupancy Rate: 63.5%

Average Daily Rate: $181

Rental Revenue

90th Percentile: $55,337

75th Percentile: $38,541

Median: $28,393

Zillow Data (2016 -2017)

Zillow Annual Rent Cost 2 Bedroom: $21,909

Single Family Homes

Airbnb Rental Data (2016 - 2017)

Full-time Home Rentals: 1,798

Occupancy Rate: 64.5%

Average Daily Rate: $165

Rental Revenue

90th Percentile: $48,545

75th Percentile: $34,406

Median: $25,664

Zillow Data (2016 - 2017)

Zillow Home Value Index: $271,512

Annual Mortgage Estimate: $15,555

The current numbers can get anyone excited about trying this new investment tool, but, outside the Chicago's 62-page Ordinance, there are a number of things to consider before turning all of your units into Airbnb's (which isn't legal, btw). Some say it helps raise property value, but there are arguments against this.

Wear-and-Tear: Wear and tear is a big part of why homeowners don't do Airbnb. It is inevitable. Just think: You are going to a new city for a few days. Are you going to treat the place, the heat, the electric, etc. like it is your own? No. The good thing is that Airbnb has put measures to minimize this. If guests want to use Airbnb again, it is in their best interest. Guests get blackballed, and can never use Airbnb again if they do real damage to your home. 

If you are doing Airbnb yourself, and not having a professional management company insuring your investment after each stay, you are keeping yourself liable for wear-and-tear, and potential insurance issues. Overall, your property is likely to depreciate more, unless you screen guests tightly and inspect your home after each stay.

Getting a Loan based on Cash Flow: Most banks do not recognize the Airbnb income unless there is a steady cash flow for the last 2 years. Some people are getting around this by providing Master Leases on the property. The problem is that the bank only recognizes the income stated on the Master Lease, not the increased cash flow from your Airbnb. This is starting to come around, but the difference in occupancy and daily pricing, makes it very hard for banks to appraise the value of a property doing short-term rentals. 

More Cash Flow? Not so fast: The numbers above point to the 75th percentile and the median range of Airbnb Profit rentals. What if one bad guest stay ruins your listing? What if you can't sell your listing to potential guests? What if the market levels out? What if you don't know how to use and market on Airbnb, VRBO, etc?

Safety and Security: If you live in a property that has multiple tenants, than safety and security is an issue. If guests are coming in every week/month, what is to stop them from playing music until 2am in the morning? What if they ruin the occupancy of your current long-term tenants? What if guests steal something? These can be prevented by clear communication for your guests, but constantly having to "police" your guests is not a good use of your time.

Even with a professional management company that specializes in short-term rentals, these beg the question: Is it worth it? Yes, the money is there right now. But, for how long? Is the volatility of occupancy worth the surge in pricing? When it comes to investing or selling your property, to depend on income from Airbnb is a tight rope between compliance, wear and tear, and more profits. 

How can you walk this line so your property cash flows and increases in value? How can owners and investors best use short-term rentals to keep rents competitive in Chicago? 

It seems like short-term rentals are a new investment tool with Airbnb growing across the world, but short-term rentals have been around for decades. The "Sharing Economy" is the new theme pushing this growth and technology is the enabler. As Airbnb continues to grow across the world, what do you think - does it bring more, or less, value to Chicago neighborhoods?