The largest key expense that multifamily apartment investors consider is construction costs. Over the last few years, these costs have seen a noticeable increase, leading to a percentage of developers losing interest in the industry. As a result of these increases in construction costs, investors these days need to know the exact cost of a potential investment before moving on to financing the operation.
However, despite the rising costs for multifamily properties, it still remains a profitable industry. Apartment complexes in the US accommodate more than a third of all households, meaning that the demand for these types of homes is high and ever-rising. Therefore, building a multifamily property is still a viable option, but you need to know the ins and outs of the process before starting construction.
What is the average cost of multifamily construction?
The average cost will of course depend on where the construction is taking place. The size and location of each project will determine the cost. But, we can get an average value of the construction costs per unit to identify a projected overall cost. Let’s take an example of a construction project for a new apartment complex with 5 floors.
Every floor will have 4 units. This will give you a total of 20 units in the apartment building. On average, a unit can cost anywhere between $89,000 to $110,000. Keep in mind that this is an average cost and doesn’t factor in variable costs such as the amount of land (per square foot) required or the quality of materials used.
Based on the above example, you can expect to pay at least $1,780,000 for a 5-floor apartment building. Whereas, for a triplex, you can expect to pay around $270,000.
It’s best to use these figures as a starting point for your apartment construction cost, but it will rarely ever be the actual figure. With additional material costs and labor costs, you may be looking at a much more inflated value. If you’re able to get more precise costs from your contractors and suppliers, you can potentially use a cost estimator tool to get a more realistic value for your new project.
Calculating the building construction costs
Before embarking on your multifamily construction journey, it would be better if you familiarize yourself with a couple of financial indicators:
- Why construction costs are always increasing
- What are the costs involved in construction projects
To answer the first part, it mostly comes down to two areas:
The cost of building materials increases on a yearly basis. Due to many factors such as increasing demand, tariffs, and labor costs, building material costs are also affected. In 2023, material costs went up by 8.3% in March compared to the same month in 2022.
The second reason is due to the need to follow regulatory compliance. The National Multifamily Housing Council (NMHC) indicates that in 2023, the regulations imposed by local governments will account for over 30% of the building cost for multifamily properties.
As such, before you even begin with the construction project, you will be facing increasing costs. This is definitely an area you need to factor in before deciding on the viability of the project.
Then, you also need to know about the many other costs involved with construction projects.
Budgeting for a multifamily construction project
There are three main areas that make up the overall multifamily construction costs.
- The Land costs
Right up front will be the cost of the land that will be used to construct your apartment building. Depending on the location, you should expect at least 15-25% of your total budget to go toward the land cost. Whether you’re building in an urban or rural area will affect this, as well as the overall square footage you’ll need for the project. One important point to keep in mind is that if you’re building in a rural area, there are local government projects that will help you with the construction, making it easier to obtain financing on better terms.
- The Hard costs
These are the costs that are going to take up the bulk of your budget. They involve labor costs, hiring costs (contractors, engineers), and material costs. You should expect at least 40% to 60% of your budget to be taken up by hard costs. This can vary widely as it is dependent on individual requirements for each building, but the takeaway is that your hard costs are the most budget-consuming.
- The Soft costs
Your soft costs include payments such as permit fees, legal fees, design fees, accrued interest, and other related payments. These will account for a smaller portion of the budget, generally 15-30%.
It is vital that you research and understand each one of these costs before starting any construction. It can be an expensive ordeal, but the silver lining is that the building you construct can ultimately become quite profitable. As long as you understand the risks and work within a set budget, your project will work out just fine.
Constructing multifamily properties is definitely a lot of work. It is also important to note that constructing brand-new apartment buildings will cost you more than purchasing one outright. But, if you’re passionate about construction, then we’ll leave you with one important piece of advice. Remember the 2% rule to keep your cash flow steady. Your rental income should be 2% of the overall expenses of constructing the building. This will help you break even faster and turn it into a lucrative project.