The legal way to rent out apartments to strangers

Each week, Grid does a deep dive on the economics of running an everyday business, from a tattoo parlor to a dog-walker. This week, we take a look at how to build and operate guesthouses.

When the recession hit, Joe Helfrich, 40, didn’t see much of a future for himself in mortgage banking. But he didn’t stray too far, making the counterintuitive decision to reinvent himself in the hospitality industry when the economy was at its nadir and tourism had ebbed to stagnation. As an independent landlord, he had already acquired 25 apartments before the economy crashed, and he converted 18 of those units into guesthouses that are scattered throughout Roscoe Village, Lincoln Park and Old Town, where he’s selling the neighborhood experience to families of tourists looking for a quiet, long-term stay.

The lightbulb: When out-of-town family wanted to visit, Helfrich didn’t have room to host, but he did have a bunch of unfurnished apartments. “I saw that there was a need for this type of housing,” he says. “This is kind of a recession-friendly business, because it’s more affordable getting a three-bedroom condo versus renting three hotel rooms. It was a good choice. We survived.”

Start-up costs: Outfitting the apartments he already owned with granite tile, stainless steel appliances, new flooring and cabinets cost Helfrich between $10,000 and $30,000 per unit. Furnishing them with beds, tables, sofas, TVs and kitchenware cost another $180,000. To keep money flowing when the credit market was tight, Helfrich relied on an established relationship with mom-and-pop Busey Bank in Champaign, Ill.

Expenses: Maintaining his guesthouses is a capital-intensive endeavor. Helfrich spends $2,000 to $4,000 a year per unit to keep the decor contemporary, and an additional $2,000 to $3,000 to stock each apartment with linens, towels, toiletries and kitchen supplies. Cable, utilities and Wi-Fi total $3,000 to $4,000 a year.

Staying on the right side of the law doesn’t come cheap. Helfrich owes the city and state a hotel tax of 16.4 percent of sales, which he passes on directly to his guests. He must also drop $500 per unit every two years to renew his rental licenses — or else risk a $1,500 to $3,000 fine from the city’s Department of Business Affairs and Consumer Protection.

Pricing: Roscoe Village offers two-, three- or four-bedroom suites ranging from $195 to $300 a night plus charges of $20 per additional guest.

To keep units occupied during the lean winter, Helfrich offers steep discounts – $2,500 for a month-long stay that would cost a summer tenant $6,000 or $7,000. Even still, his business is highly seasonal. In the warm months, he boasts a 97 percent occupancy rate. In January, it dips to just 10 percent.

Competition: Tourists determined to stay in a ritzy hotel on Michigan Avenue aren’t the type of clientele Roscoe Village Guesthouse vies for, but local bed and breakfasts and unofficial rentals do pose some competition.

Airbnb, a website that lets anyone turn their home into a temporary rental, has been banned in New York City but continues to promote 1,866 rentals in Chicago. Despite the site’s popularity, Helfrich says he considers Airbnb a “lot of illegal units that aren’t legitimate and aren’t licensed, and a problem for the city of Chicago.”

Airbnb users aren’t subject to the same fees and inspections that eat into Helfrich’s profits. “They’re not regulated by the city,” he says. “We get guest calls from people who thought they had a place that was available and they show up and it’s not, so they call us to book last minute, scrambling. That’s the risk consumers take when they get a rental that’s not licensed.”

Neighborhood relations: Roscoe Village Guesthouse must be mindful of neighbors who would happily swap strangers with suitcases for more permanent residents. To keep the peace, Helfrich tries to make sure his business reflects well on the neighborhood.

A zero-party policy, 10 p.m. curfew for outdoor spaces and required stays of at least three to five days over the weekends keep the locals from calling the cops. Even if it means Helfrich forgoes the lucrative bachelor and bachelorette party market.

Efficiency gain: Helfrich keeps units cost-effective and sustainable with remote-control thermostats and tankless hot water systems that cut down on costs when the buildings are unoccupied. The green tricks save him roughly $18,000 per year.

The bottom line: Helfrich declined to talk specific figures, but he promises there’s more money in the guesthouse business than he was renting. “You probably double your profits versus if you’re renting unfurnished units,” he says. “To do one or two of these would be a headache, but 18 is a lot easier. Economy of scale.”

Photo by Susan Du