Xixi's shikumen community, where she provides B&B services.

Under Chinese law, a hotel must be registered with industry and commerce authorities and pass fire safety and sanitation checks. Although the B&B industry is thriving, such lodging options fall within a gray area in terms of legitimate commercial operations.

Yang Anna, a Shanghai native who rented six shikumen apartments downtown and turned them into B&Bs, says she consulted the authorities before starting her business and discovered there was no business license that applies to them.

Problems can arise when such accommodation is unprotected by law, lawyers say.

"If the guest engages in illegal activities in the residences, the owner of the house is liable," says Fu Zhongwen, a senior partner at Long'an Law Firm in Shanghai.

Online rental sites encourage the operators of B&B accommodation and lodgers not to trade without an intermediary as this will make it hard for mediation to take place.