Our CommercialForum Committee held the second event in its power lunch series this summer, which covered the kind of development that happens one property at a time, led by individual owners and small investors in neighborhoods across Chicago: accessory dwelling units.
Chris Pezza, VP of Development at Corcoran Urban Real Estate and chair of the CommercialForum Committee, hosted the session. He was joined by Miguel Chacon, a Chicago REALTOR® and broker/developer at COMPASS with nearly 20 years of residential and multifamily experience. Chacon has completed four ADU projects in the city and has two more under construction. He walked attendees through the full process: identifying an opportunity, evaluating the cost, managing construction and what he would do differently.
Couldn’t attend the event? You can watch the full video here:
Key Takeaways
- Chicago’s ADU ordinance went citywide on April 1, 2026, following a 2020 pilot program and a citywide ban that had been in place since 1957.
- Zoning, alderman approval and unit limits per block still restrict where and how many ADUs can be built.
- Coach houses ($400,000 to $700,000 or more) rarely make sense as rental investments. Garden-level conversions ($145,000 to $170,000) are a more cost-effective option.
- Chacon estimates that only about 10% of the properties he evaluates end up making financial sense.
- Plan for 9 to 12 months from permit submission to a finished unit, and estimate costs and rents conservatively.
- Even a fully permitted project can be delayed by unrelated city requirements, such as a trash enclosure mandate.
A Brief History
ADUs, sometimes called granny flats or coach houses, were common in Chicago’s older housing stock going back to the 1940s. The city banned them in 1957. A pilot program launched in 2020, and the ordinance went citywide on April 1, 2026, though Chacon noted it came with more restrictions than the industry had hoped for.
Where ADUs Are Allowed
Chicago’s ADU rules do not apply citywide. They are permitted in RT and RM zoning districts, and in B1 through B3 and C1 through C2 mixed-use districts. In RS zoning, an alderman must opt in before ADUs are allowed at all. There are also limits on how many ADU permits can be issued per block each year: one in RS1, two in RS2, and up to three in RS3 and above. A building must be at least 20 years old to qualify, and the number of ADUs allowed depends on the building’s existing unit count. An owner can add one ADU to a building with one to four units. Larger buildings can add more, with affordability requirements applying as the unit count increases.
Coach Houses Are Expensive to Build
Coach houses, the standalone structures built behind a primary building, are the type of ADU most people picture first. They are also the least likely to work financially as a rental. Chacon estimated construction costs of $400,000 to $600,000, with one recent project exceeding $700,000. Every coach house he described in his presentation was built to house a family member, not a tenant.
“They’re not financially viable as investments,” Chacon said. “You’re not going to make your money back on these coach houses. They’re mainly built for related living arrangements.
Garden-Level Units Cost Less
A garden-level conversion is a more affordable option, though it still requires significant investment. Chacon broke down the typical cost:
- Excavation and foundation work: $50,000 to $60,000
- Utility work, including new water, sewer and electrical service: $40,000 to $50,000
- Interior build-out, depending on finishes and the number of bathrooms: $50,000 to $60,000
In total, he estimated $145,000 to $170,000 for a garden-level unit built to code. Attic or top-floor conversions run $80,000 to $100,000 or more, depending on how much roof and utility work the space needs.
“People think you can add an ADU for $25,000 or $30,000,” Chacon said. “If you’re doing it right, with the proper heating and cooling and water service, these are realistic numbers for the projects I’ve done.”
Research Before You Buy
Some of Chacon’s best opportunities came from listings where the seller’s agent did not know the full history of the property. He described using historical maps, filing public records requests with the city’s water department, and reviewing old water records to confirm a building’s true unit count. In one case, this research showed that a property was legally a four-unit building, though the seller had believed for 35 years that it was not.
“What is it that when we’re looking at properties, everyone else is not seeing?” Chacon said, describing how he evaluates a listing before making an offer.
Estimate Conservatively
Chacon’s approach to underwriting is to test a deal against the worst realistic outcome before moving forward: higher construction costs, lower rent and higher vacancy. He said only about 10% of the properties he evaluates still make sense under those conditions. He also cautioned against relying on a single financial metric, such as a target rate of return, since those numbers can be adjusted to support almost any conclusion.
“One hundred percent of my forecasts have been wrong,” Chacon said. “I’ve gone back with clients five years later to see how the property actually performed, and I typically underestimated the rental income.”
He also emphasized building for the renter, not for personal preference. “I wouldn’t live in 500 square feet, but that doesn’t matter,” he said. “The question is whether the renter looking for this kind of unit, in this location, is willing to pay for the finishes and amenities.”
Financing and Timeline
For owners staying under four total units, a renovation loan, such as an FHA 203(k), is typically the most workable financing option. These loans consider the property’s projected value after repairs and usually include a cushion for cost overruns. Chacon said he is currently underwriting projects at roughly 7% interest.
On timeline, he recommended planning for 9 to 12 months from permit submission to a finished, move-in ready unit. “That’s not architectural work, that’s from submission to delivering keys,” he said. “I wouldn’t budget for anything faster than that.”
City Requirements Can Cause Delays
Even a fully permitted project ran into an unrelated obstacle: a city requirement that any building adding a sixth unit include a dedicated enclosure for trash cans. Chacon’s team is now pursuing a zoning variance at the same time, adding roughly $4,000 in legal and architectural fees, in order to move forward without building the enclosure.
“I cannot provide an additional unit of housing to house people because the city is more concerned about where I house the garbage can,” Chacon said.
Answers to Common Questions
Attendees asked Chacon several practical questions:
- Appraisals: A legally permitted ADU is treated as a legal unit, and its rental income is included in the property’s projected after-repair value. An unpermitted unit is not.
- Exits: Ground-floor ADUs under roughly 825 square feet need only one exit. Attic and top-floor units need two.
- Modular construction: Prefabricated units are allowed if they meet code, but crane access is often the limiting factor on tight urban lots.
- Policy priorities: Chacon pointed to union labor requirements for coach houses, along with electrical and water service requirements that exceed actual need, as the biggest drivers of unnecessary cost.
Advocacy and Next Steps
Chacon closed by encouraging REALTORS® in the room to stay engaged with their alderman as the ADU ordinance continues to develop. “I want everybody to succeed,” he said. “I want everybody to do well, and to learn from my mistakes and the things I’ve been doing.”
A recording of the session is available to watch on demand in our video library.