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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 — and when existing brick needs $200K+ in structural, plumbing, and envelope work that 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 that still leaves 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.
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 (85% LTV rate-and-term, select markets) | $837,250 @ 6.75% |
| Annual debt service (P&I est.) | ~$39,900 |
| NOI | ~$42,800 |
| DSCR | ~1.07 |
1.07 DSCR clears minimums on select programs but leaves thin margin. Pre-lease one unit at $1,800/mo before CO, or presell one unit at $325K to reduce construction balance at CO.
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.
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 — but only if LTC, permit calendar, and DSCR exit survive local friction.
Related resources
- New construction loans Chicago
- 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+ 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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