Multifamily Construction Costs: An Investor Guide — Multifamily.Loans (2022)

Multifamily Construction Costs: The Basics

For multifamily investors and developers, construction costs remain one of the biggest expenses, and it looks like costs are only continuing to increase. Unfortunately, these climbing costs could be having a negative impact on the industry as a whole. In fact, in a 2018 report, the National Association of Home Builders linked construction cost increases to multifamily developers’ lack of confidence in the overall market. Due to these ballooning costs, it’s more important than ever for developers and investors to understand the exact nature of multifamily construction budgets, and why they keep rising so quickly.

Why Multifamily Construction Costs Are Rising

According to the National Multifamily Housing Council (NMHC), regulatory compliance is one of the biggest reasons for the increase in multifamily development costs, counting for a staggering 32% of overall costs. While some of these rules and ordinances are clearly necessary (i.e. basic fire safety regulations), others are often needlessly complex. However, compliance costs isn’t the only area where construction expenses are rising. In fact, from September 2017 to September 2018, U.S. construction materials prices shot up by a sizable 7.4%-- enough to put a dent in any development budget. In addition to compliance and materials costs, labor costs have also recently increased, along with tariffs for imported goods, putting added upward pressure on construction prices.

How Construction and Development Costs Are Estimated

In the initial stages of a project, multifamily and commercial developers will typically utilize historical data from previous development projects, attempting to account for similarities and differences in their estimate (much like an appraiser might look at other properties using the sales comparison approach). However, due to constantly changing economic factors, it can be difficult to determine an exact budget, at least at first.

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This is partially because, in the early stages of a development project, developers, contractors, and architects often rely on simplified, DIY cost estimation methods. In fact, simple “plug and play” excel construction cost estimate templates can easily be found online. These can usually give developers a good ballpark cost estimate, provided they input accurate information. While DIY spreadsheets are great for estimation, the vast majority of larger projects will bring in a professional construction cost estimator later on in the process. Though this can be expensive, getting an accurate budget estimation before breaking ground can often save developers thousands of dollars in the long run.

Hard vs. Soft Costs for Multifamily Construction

If you’re trying to estimate or analyze multifamily construction costs, it’s essential to understand the difference between hard and soft costs. Hard costs include all costs related to the physical construction of a building, including laying foundations, roofing, landscaping, appliances, and the like. Soft costs are typically intangibles, and include expenses such as permit fees, architectural costs, legal fees, construction loan interest and fees, and other similar expenses. On average, about 37% of a property’s development costs are hard construction costs, 24% are soft costs, and 19% can be attributed to land acquisition costs (and demolition costs, if necessary). The remaining 25% goes the investors in the form of equity returns.

In many cases, developers manage apartment and condo construction projects for a certain fee, but do not provide the majority of the capital. Instead, they usually partner with a group of investors who finance much of the development. Developer fees can vary significantly, but they are often set at 5% of soft and hard development costs. If the developer also acquired the land for the project, they might charge an additional acquisition fee of 1-2% of the purchase price.

How Much Does Multifamily Development Actually Cost?

According to the most recent cost estimates, multifamily apartment construction currently costs between $64,500 to $86,000 per unit. This estimate uses contractor fees of between $85 and $200 per square foot (psf) to provide a reasonable range between the most and least expensive markets, as the average contractor fee in the U.S. is about $125. The estimate also calculates mason, excavator, and carpenter fees at $70/hour, painters at $20 to $35/hour, plumbers at $45 to $65/hour and electricians a $65 to $85/hour. However, these numbers go out the window in the nation’s largest and hottest markets; for instance, in San Francisco, apartment construction costs currently sit around $330/psf, while in Los Angeles, they currently clock in at a staggering $500/psf.

In addition to direct construction costs, architects are also an essential part of the construction and development process, and will typically account for about 10% to 15% of the entire construction and development budget. Commercial architecture firms generally charge between $125 and $250/hour, though costs may be significantly higher in major markets.

When calculating apartment and multifamily construction costs, it’s also important to factor unusable and inaccessible space. On average, about 15% of the square footage of multifamily property consists of unusable space such as elevator shafts, building lobbies, and common areas. For instance, a 2,000 square feet of construction, would, in practice, only result in 1,700 feet of usable apartment space. This increase is nearly always passed onto the future renters, or owners, if the building is a condo.

Architects’ Role in Multifamily Development

While contractors are responsible for supervising and hiring workers to physically build out a property, architects are responsible for creating detailed plans for the entire development. In many ways, a building is only as good as its plan, so choosing a quality architect is of the utmost importance. The responsibilities of an architectural firm include:

  • Create an initial plan and budget for the project

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  • Create a work list and plan outline

  • Draft schematic designs and floor plans

  • Help developer review contractor bids and select a contractor

  • Review architectural plans with relevant agencies, and obtain needed permits, including general construction permits (some permits may later become the responsibility of the contractor)

  • Collaborate with structural engineers and planning agencies

  • Monitor the contractor’s progress and payment requests

Contractors’ Role in Multifamily Development

Choosing the right contractor is essential, as they’re responsible for the day-to-day management of the construction site. Choose a good contractor and your project will likely go smoothly, and, assuming your initial construction cost estimate was accurate, within budget. Choose poorly, and you may find yourself well behind schedule and over budget-- which can be disastrous, especially since most multifamily development projects are financed with construction loans, which must generally be repaid within a limited timeline.

Overall, the responsibilities of a contractor generally include:

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  • Sourcing and purchasing all materials and services to build the property, start to finish

  • Obtaining all relevant construction and utility permits

  • Advising the owner/developer and the architect on the best ways to decrease costs and reduce project timelines (while maintaining or improving quality)

  • Selecting, hiring, and supervising subcontractors

  • Cleaning the entire property after construction is complete

Contractors are typically responsible for sourcing and installing all building elements, as well as taking care of certain administrative functions. These responsibilities generally include:

  • Bath fixtures, plumbing fixtures, plumbing rough-in and connection

  • Cabinets, countertops, and built-in appliances

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  • HVAC and insulation for building and individual units

  • Carpets and flooring

  • Exterior finishes and trim

  • Insurance and site/property cleanup

  • Permits, utility work, providing plans and specs for permitting

  • Lighting fixtures, painting, interior wall finish

  • Doors, windows, roofing and wiring

  • Rough/finish carpentry and hardware

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  • Property excavation, foundation, piers, and flatwork

The Importance of Understanding Multifamily Construction Costs

Whether you want to get your hands dirty with a massive real estate development project, or you simply want to passively invest in apartment construction or rehabilitation, understanding multifamily construction costs is essential. Though costs vary significantly by area, understanding national and local cost averages for contractors, subcontractors, architects, materials, and other expenses can help you ensure that you aren’t grossly overpaying for any part of your project. Perhaps just as importantly, you can make sure you aren’t investing with a developer who doesn’t place a priority on effective budgeting.

FAQs

How do you value an apartment building? ›

Just take the sales price and divide it by the number of units for each apartment building. Next compute the average of all 4 properties together to come up with the average price per door. For example if the subject property is being sold for $2,310,000 and has 16 units: $2,310,000/16 = 144,400 per unit.

How much does it cost to build a fourplex in California? ›

The average cost to build a fourplex per unit is around $104,750. However, you may pay anywhere from $47,500 to $162,000 per unit, depending on location and what upgrades you choose to include in your units.

How do you evaluate small multifamily properties? ›

How to Evaluate Multifamily Properties for the Highest ROI
  1. Conduct Market Research. ...
  2. Choose Your Neighborhood. ...
  3. Secure Financing. ...
  4. Evaluate Potential Repairs. ...
  5. Calculate Long-term Expenses. ...
  6. Calculate the Net Operating Income (NOI) ...
  7. Calculate Cash Flow. ...
  8. Calculate Capitalization Rates.
Nov 8, 2021

How do I buy my first multi family property? ›

How To Buy a Multifamily Investment Property in 9 Steps
  1. Decide on Your Budget. ...
  2. Examine the Different Types of Multifamily Property. ...
  3. Research Potential Neighborhoods & Choose a Location. ...
  4. Choose Your Lender & Get a Pre-approval Letter. ...
  5. Find a Real Estate Agent To Work With. ...
  6. Narrow Down Your Search to One Multifamily Property.
Aug 2, 2022

How much does it cost to build a 4 unit apartment complex? ›

How much does it cost to build a 4 unit apartment building? Based on the averages in this article, the average cost of a 4 unit apartment building is $258,000 to $344,000. However, these costs can vary wildly based on location, property condition, amenities, etc.

How much does it cost to build a 20 unit apartment complex? ›

Cost to Build a 20-Unit Apartment Building

20-unit buildings are 4 to 10 stories on average, making their average price range between $3.2 and $21.4 million.

Are 4 plexes a good investment? ›

Fourplexes are a great investment strategy for beginners due to their relatively low barriers to entry. They are a good way to generate a good cash flow, they are easier to manage than four individual properties, and they can still be purchased with a residential loan.

How long does it take to build a 4 plex? ›

Lastly, 2 to 4 unit buildings required only 11.4 months. The average time from permits to start, however, does not follow the same pattern with respect to property size.

Is it cheaper to build or buy a duplex? ›

Because of the shared lot, shared foundation, and shared roof, a duplex is much cheaper to build than two separate houses. On average, building a duplex costs 37% less than building two homes. And that's not including the cost of the land!

How do you calculate the value of a rental property? ›

The value of a rental property using the cost approach is based on the following formula: Value of Property = Cost – Depreciation + Land Value.

How do you value a building? ›

The valuation of building or property is found by multiplying the net income by year's purchase. The valuation, in this case, can be too high in comparison with the actual cost of construction.

Is owning an apartment building a good investment? ›

Owning an apartment building is one of the best possible investments because owners can hedge inflation in two ways — through capital appreciation and rent increases.

What is the 1 rule in real estate? ›

The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.

Videos

1. Multifamily Investing with Commercial Loans
(Angelo Christian)
2. Apartment Construction | Building new multifamily units from the ground up as an investing strategy
(Ken McElroy)
3. 5 Real ESTATE Investment Strategies to Use In an Uncertain Economy
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