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Chicago Teardown-Rebuild Economics Guide 2026
By Jason Taken · Principal, Jaken Finance Group
Chicago infill teardown economics 2026 — LTC/ARV math, DOB permit timelines, hard money at 8.99%–13.5%, and a worked West Ridge 3-flat example.
Every RT-4 zoned lot in Chicago forces the same fork: rehab the existing brick or tear down and rebuild? In 2026, teardown-rebuild economics win where land value exceeds rehab value but new vertical rental stock commands premium rents — West Ridge, Albany Park, Bridgeport, and Humboldt Park pockets where distressed two-flats trade below replacement cost.
This guide covers LTC and ARV math, demolition, construction loan structure, DOB permit timelines, and exit underwriting — the companion to new construction loans Chicago. For acquisition on existing stock, see hard money lenders Chicago and fix and flip loans Chicago. For permanent hold exits, see DSCR loans Chicago and the Chicago two-flat and three-flat financing guide.
When teardown beats rehab
Run this comparison before you option a lot:
| Input | Rehab existing 2-flat | Teardown → new 3-flat |
|---|---|---|
| Land / building basis | $320K (distressed brick) | $180K land + $45K demo |
| Vertical cost | $165K rehab | $520K new build |
| Total project cost | $485K | $745K |
| Stabilized ARV | $620K–$680K | $950K–$1.05M |
| Per-door rent (new) | $1,500–$1,750 | $1,800–$2,100 |
| Timeline | 6–9 months | 14–18 months |
| Product | Fix and flip or BRRRR | Construction loan — up to 100% LTC |
Teardown wins when per-door rent on new construction clears DSCR at the higher basis. It also wins when existing brick needs $200K+ in structural, plumbing, and envelope work. That spend approaches new-build cost without new-build efficiency. If the as-is building trades at a discount because the next buyer must cure violations, weigh demolition plus carry against a gut rehab. A gut rehab can still leave 1920s floor plates and undersized mechanical rooms.
Submarket rent ceilings matter. Our Chicago neighborhoods best for flipping 2026 hub maps where new vertical product clears local bands — infill sponsors who ignore them build beautiful three-flats that fail refi.
LTC and ARV math — how lenders underwrite infill
Construction lenders price Chicago infill on two leverage rails that must both pass:
| Metric | Typical cap (qualified files) | What it measures |
|---|---|---|
| LTC (loan-to-cost) | Up to 100% | Loan ÷ total project cost (land + demo + vertical + soft costs) |
| LTARV (loan-to-ARV) | Up to 75% | Loan ÷ as-completed appraised value |
West Ridge 3-flat preview:
- Total project cost: $735,000 · As-completed ARV: $985,000
- Max loan at 100% LTC: $735,000 ✓ · Max at 75% LTARV: $738,750 ✓
- Binding constraint: LTC — cost-heavy, not ARV-constrained
Stress the same deal at $850K ARV: 75% LTARV caps the loan at $637,500 — only 86.7% LTC. Sponsor equity gap: ~$97,500 plus interest reserve. Model ARV down 10–15% before land close.
Interest carry (outside LTC on many term sheets, but required in pro forma):
| Loan balance | Rate | Months IO | Interest carry |
|---|---|---|---|
| $735,000 | 11.0% | 16 | ~$91,500 |
| $700,000 | 11.5% | 14 | ~$94,000 |
Budget 2–4 months of interest beyond the draw schedule. Exhausting reserves at month ten triggers extension fees or forced sale of a half-built frame.
Cost per square foot — 2026 Chicago reality
| Build type | All-in $/sf (vertical) |
|---|---|
| Standard 2-flat gut rehab | $120–$180/sf |
| New vertical 3-flat | $200–$280/sf |
| High-spec Lincoln-adjacent | $300+/sf |
| Rear ADU addition (permitted) | $250–$350/sf |
Material costs stabilized mid-2026, but union-influenced labor and DOB backlogs extend calendars. Budget 8–12% soft cost (architect, structural, insurance) on hard construction. Lock GC pricing before land close.
Construction loan and hard money structure
Jaken Finance Group new construction parameters for Chicago infill:
| Parameter | Range |
|---|---|
| Rate | 8.99%–13.5% interest-only during build |
| LTC | Up to 100% on qualified files (land + vertical) |
| LTARV | Up to 75% of as-completed value |
| Term | 12–18 months + extensions |
| Draws | Foundation, framing, MEP rough, drywall, CO |
| Close | 10–14 business days with complete file |
Draws release against DOB inspection milestones — photos, lien waivers, and often third-party inspection. Plan 5–7 draws on a $500K+ vertical. Files that close fast include stamped plans, GC line-item budget, comp-based ARV narrative, written exit, and interest reserve. Compare products at best hard money lenders Chicago 2026.
DOB permit sequence — budget real calendar time
Permitting is a gating cost in your LTC spreadsheet, not a footnote.
| Phase | Typical duration | Risk factors |
|---|---|---|
| Zoning / entitlement | 2–6 weeks | Aldermanic review, community meetings |
| Demolition permit | 4–12 weeks | Orange-rated structures: 90-day delay |
| Foundation | 6–10 weeks | Winter pours below 40°F need blankets |
| Structural / framing | 8–14 weeks | Union scheduling, steel lead times |
| Rough MEP | 6–10 weeks | Long-lead mechanicals at framing |
| Drywall / finish | 10–16 weeks | Peak-season inspection backlog |
| Certificate of occupancy | 2–6 weeks | Final life-safety sign-off |
Total: 12–18 months permit to CO. Add 2 months if foundation is not poured by mid-October. Pour by mid-October or wait until April. Roofing in November kills schedules.
Demolition sequencing is a cash calendar
A Chicago wrecking permit is not the first vertical draw. Utilities must disconnect. Cook County records the demolition before the new-construction permit issues. Orange-rated structures can add a 90-day hold. On a $175,000 land basis at 11% interest-only, ninety days of idle land is about $4,800 that never appears in the GC bid.
Sequence the file so demolition and site clearing are funded before vertical draws start. Confirm gas and water disconnect dates with the city before you wire land money. A stalled disconnect in January idles a lot while interest still accrues. The Chicago new construction page covers the lender file. This article’s point is the fork math. If demolition plus carry exceeds the spread of a gut rehab, stay on the rehab side of the table above.
Dual-exit stress before you option the lot
Run three numbers before you lock land.
- Sale: As-completed value less about 8% selling costs and Chicago plus Cook transfer stamps.
- DSCR hold: 70%–75% LTV on as-completed value, 1.0+ DSCR after RLTO expenses.
- Hybrid: Presell or pre-lease one door so the construction balance drops at certificate of occupancy.
If only the sale works, you have a spec. If only DSCR works, you have a hold. If neither works after a 10% haircut to as-completed value, you do not have a teardown. You have a lot you should not buy. Model ARV down 10–15% before land close. The West Ridge file at $850,000 as-completed is the warning. Seventy-five percent of $850,000 is $637,500. That is only 86.7% of the $735,000 cost stack. Sponsor equity jumps by about $97,500 plus interest reserve.
Zoning checklist before land close
- RS-3 / RT-4 — confirm multifamily entitlement and unit count
- ARO triggers — Affordable Requirements Ordinance on larger developments
- ADU pilot — rear coach houses in select wards
- Aldermanic review — community meetings add calendar risk
- Environmental — Phase I on commercial-adjacent lots; soil borings on vacant land
Alternative to ground-up: condo deconversion financing Chicago when existing stock trades below replacement cost.
Worked scenario: West Ridge teardown → 3-flat
Representative 2026 infill file — underwrite your own comps.
| Line item | Amount |
|---|---|
| Land acquisition | $175,000 |
| Demolition + permits | $48,000 |
| Vertical (new 3-flat, 3,200 sf @ ~$160/sf) | $512,000 |
| Soft costs (architect, structural, insurance) | $58,000 |
| Total project cost | $793,000 |
| Construction loan (100% LTC on hard costs) | $735,000 @ 11% IO |
| Sponsor equity (soft costs + reserve) | $58,000 |
| Build + lease timeline | 16 months |
| Interest carry (avg outstanding ~$400K) | ~$91,500 |
| Stabilized gross rent | $5,400/mo ($64,800/yr) |
| Operating expenses (RLTO, taxes, insurance) | ~$22,000/yr |
| Net operating income | ~$42,800/yr |
| As-completed ARV | $985,000 |
| LTARV at $735K loan | 74.6% ✓ |
DSCR exit:
| Input | Value |
|---|---|
| DSCR refi at 70%–75% LTV on $985,000 | $689,500–$738,750 |
| Construction balance at CO | $735,000 |
| Cash to close the construction loan | $0–$45,500 depending on LTV |
| Annual debt service (P&I est. at 75% / 6.75%) | ~$35,200 |
| NOI | ~$42,800 |
| DSCR | ~1.22 at 75% LTV |
Do not model an 85% LTV takeout on this product. Seventy-five percent of $985,000 is $738,750, almost a wash with the $735,000 construction balance. There is little cash-out at certificate of occupancy. If the takeout lands at 70%, you bring about $45,500. Pre-lease one unit at $1,800/mo before CO, or presell one unit at $325,000, to cut the construction balance.
1.22 DSCR at 75% LTV is healthier than the old 85% fantasy. It still leaves thin room if taxes reassess or one unit sits. Dual-exit underwriting (sale or DSCR) survives 2026 carry pressure.
Flip exit alternative: Sale at $985K less 8% costs (~$79K) and $793K TPC yields ~$113K gross spread before carry — acceptable for some sponsors, insufficient for others. Dual-exit underwriting (sale OR DSCR) survives 2026 carry pressure.
Spec vs pre-sold exit
| Exit | Pros | Cons |
|---|---|---|
| Spec hold (DSCR) | Recycle capital via refi | Carry through lease-up; RLTO compliance |
| Pre-sold unit | Reduces loan balance at CO | Buyer financing contingency |
| Full building sale | Clean exit | Margin compressed by sale costs |
Many sponsors pre-lease one door and DSCR the rest — hybrid exit that satisfies lender requirements while building in-place rent history.
Interest on the West Ridge file is not a rounding error. Sixteen months of interest-only on an average outstanding near $400,000 at 11% is about $58,700, and the table above uses a higher $91,500 when more of the $735,000 is outstanding. Budget the higher number. Exhausting reserves at month ten triggers extension fees or a forced sale of a half-built frame.
Chicago infill vs collar county horizontal
| Chicago infill 3-flat | Collar county SFR new | |
|---|---|---|
| Permits | DOB, slower | Municipal, faster |
| Product | Vertical rental | SFR / duplex |
| RLTO | Yes | No |
| Labor | Union-influenced | More flexible |
Chicago infill commands rent premiums collar county horizontal cannot match. That premium only counts if LTC, permit calendar, and DSCR at 70%–75% LTV survive local friction. Collar plats and builder takedowns live on the Will, Kane, and McHenry small-plat guide. Do not send a Will sketch plat to this teardown model.
Related resources
- New construction loans Chicago
- Illinois spec home construction loans
- New construction loans for investors
- Will, Kane, McHenry small-plat financing
- Chicago two-flat financing guide
- DSCR loans Chicago
- Hard money lenders Chicago
- Condo deconversion financing
Chicago Teardown-Rebuild Economics Guide 2026 — next step (2026)
Model LTC and LTARV together, flip spread after 8% sale costs, and DSCR at 1.0+ on 70%–75% LTV before you lock scope. Dual-exit files survive 2026 carry pressure. Chicago deals need local sold comps and neighborhood rent bands, not statewide templates.
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