Multifamily Construction Costs: An Investor Guide
Construction costs are the major expenses that investors in multifamily apartments consider. Recently, these costs have been increasing, making developers lose interest in the market. Because of this hike in construction costs, investors seek to know the expenses involved. Doing so will help them make budgets accordingly.
Despite the hike in construction costs for multifamily apartments, it is still a lucrative business for investors. That is because over one-third of all households reside in apartment buildings so the demand is high.
Whether you want to invest passively or actively in multifamily properties, it is necessary to understand the construction costs. Although it varies from one area to another, we recommend that you know the national and local average for every category. Doing so will protect you from overspending on any aspect of the construction.
What is causing the hike in construction costs?
The major reason for the hike in multifamily construction costs is regulatory compliance. According to the National Multifamily Housing Council (NMHC), this alone will consume 32% of the total cost.
Another aspect of construction costs that is also increasing is the cost of building materials. The cost of building materials has increased by over 7.4%. Tariffs for imported items and labor costs are also among the reasons for the hike in construction costs.
Where your money goes when constructing a multifamily apartment
There are three essential aspects that you need to consider when budgeting for your multifamily apartment. They include:
Land cost
The cost of land is the first large expense that you will notice. Depending on the location, it can gulp between 10 % to 20 % of the overall budget. If you want to situate your multifamily apartment in an urban area, the cost of acquiring land will be more than that of a rural area.
Hard costs
Hard costs involve expenses on labor, building materials, engineering, contractors, and subcontractors. These will account for about 50 % to 70 % of the overall budget. From this, you will notice that hard costs consume the dominant part of the budget.
Soft costs
Soft costs include legal fees, permit fees, architectural fees, construction loan interest, interior design fees, and other supplementary expenses. All these will take about 20 to 30 % of the total budget.
Most times, developers handle the construction of apartments for a fee. They do not provide the capital. However, they can partner with investors who will finance the construction. The fees for developers are about 5% of the hard and soft costs, but this may vary. Developers can charge an additional 1-2% of the purchase price as an acquisition fee if they also acquired the land.
A breakdown of the cost and the roles
Architect’s fees and contractor’s bids are the highest costs you will notice in your multifamily construction costs. Among the hard costs, the contractor’s fee is the highest. Also, the architect’s fee is the highest among all the soft costs.
The contractor’s fee is high because they play a crucial role. The duties of contractors include:
- Assist in processing all the necessary permits
- Source for authentic construction materials
- Select, hire, and supervise subcontractors in different aspects
- Execute the project according to budget and schedule
- Clean up the site after finishing the construction
The architect’s fee is also high because they perform the following duties:
- Help figure out the project’s scope
- Create a schematic design of the building plans
- Create an initial budget
- Complete the paperwork and decide on the necessary materials needed
- Oversee the hiring process and assist the investors in reviewing bids and select the contractor
- Work with planning agencies and structural engineers
- Act as a project manager for the smooth execution of the project
Additional aspects you should consider
Providing specific prices for construction costs may be difficult because the expenses will vary depending on the materials, sizes, and location. Neighborhoods with a housing boom will have higher prices.
Before constructing a multi-family apartment, study the vital statistics in the area. These include rents, vacancy rates, and competitors.
Remember the 2% rule in real estate. It means that the rent for the rental property should be equal to 2% of the entire expenses.
It is not a requirement that you must possess a real estate license before owning a multi-family apartment building. However, it is essential to have a manager that will supervise the property. It is much easier than being a DIY landlord.
The Bottom Line
It is essential to understand the construction cost of multifamily apartments. Doing so will help you to plan and execute your project effectively. Whether you want to invest passively or actively in multifamily apartments, we recommend that you always employ the services of professionals who can guide you throughout the process.
Are you considering a Multifamily construction project?
Give our multifamily construction experts a call. We are happy to help guide you through the process, walk a prospective property or give an initial construction budget.
