On average, it costs $22 million to build an apartment building in 2020. While that figure may seem high at the outset, once you've had a chance to see a breakdown of where your money is going, odds are it'll begin to make more sense. To that end, below is an overview of the various costs that go into building an apartment building, as well as some average figures to help you start budgeting for your next big real estate investing move.
What goes into the cost of building an apartment building?
Before getting into the specifics of what it costs to build apartments, it's important to take a closer look at where your money will go when you start to build an apartment building. With that in mind, we took the liberty of breaking down three of the biggest spending categories you need to have in your budget.
In order to do that, we relied on recent data provided by the Metropolitan Policy Program at Brookings, a nonprofit public policy organization. Here's what they found in their research:
Land costs are the first big expense in multifamily construction. The Brookings data estimates that land costs typically account for between 10% to 20% of the budget. Though it's not specifically mentioned in the report, location likely has a lot to do with this percentage. For example, a building located in the heart of an urban area will probably have higher land costs than one in a rural area.
Generally, you can expect that hard costs will make up the vast majority of the budget. In terms of construction cost, hard costs account for materials and labor costs. More specifically, it can include engineering costs, as well as any contractor and subcontractor bids. The Brookings data suggests that hard building costs will account for between 50%–70% of the budget.
The final 20%–30% of the budget consists of soft costs, according to the Brookings data. Soft costs typically include any supplemental fees, like architectural fees, interior design fees, and legal fees.
Interestingly, the Brookings data categorizes everything that isn't a land cost or a material or labor cost as a soft cost. Other assessments may break down these costs further into other categories. Finishes, for example, might be broken down into another category known as "Furniture, Fixtures, and Equipment (FFE)." Some assessments separate the development cost into its own separate category as well.
Breaking down the costs: Who plays what role in the building process?
When you're building an apartment complex, two of the biggest costs are bound to be your contractor's bid and your architect's fee. While the contractor's fee will make up the majority of your hard costs, the architect's fee will make up the majority of your soft costs. With that in mind, below is a breakdown of the various roles these two professionals play in the building process.
- Figures out the scope of the project.
- Creates an initial budget.
- Creates a set of building plans.
- Finalizes any drawings and the selections for materials and finishes.
- Oversees the hiring process.
- Completes construction paperwork.
- Acts as a project manager and ensures the project is moving along smoothly.
- Supplies the necessary materials.
- Does the actual contracting work.
- Brings on subcontractors as needed.
- Pulls all the permits.
- Works with the architect and the building owner to deliver the project on budget and on schedule.
- Performs a final cleanup of the job site once the work is finished.
What is the average price per square foot for an apartment complex?
Now that you know a little bit more about what costs you can expect to encounter while building multifamily housing, we can start looking into more specific costs. However, since the cost of building an apartment building can vary widely, it can be helpful to start on a granular level.
In this case, we mean by looking at the price per square foot versus the cost of the building as a whole. That way, you'll have a better idea of how to work out the construction cost for your building based off of the projected square footage.
The Brookings data found the following average price per square foot for each level of apartment building:
- Low-rise (5-50 units): $150-$225.
- Mid-rise (50-200 units): $175-$250.
- High-rise (200+ units): $225 -$400+.
That said, the Brookings data also notes that the figures they've provided are for market-rate apartments, which can vary widely depending on geography, as material and labor costs tend to vary by that as well. It specifically mentions that this data may not be applicable to affordable housing projects, which receive subsidies from local governments. Those types of construction projects are held to their own cost standards.
Doing the math: How much does the average apartment building cost?
With those numbers in mind, it's easy to come up with a clearer number for how much the average apartment building will cost to build. For the purposes of this exercise, let's assume that the average apartment is 882 sq. ft., as the most recent data from the U.S. Energy Information Administration suggests.
Based on those numbers, below is the average cost range for each type of apartment building:
- Low-rise (5-50 units): $661,500 - $9,922,500.
- Mid-rise (50-200 units): $7,717,500 - $44,100,00.
- High-rise: (200+ units) $39,690+.
However, keep in mind that these are only average figures. While they should give you an idea of what you can expect to spend, it doesn't account for the fact that not every unit in a multifamily property is going to be 882 sq. ft. Nor does it account for the added costs of amenities like a gym or a swimming pool.
The bottom line
Building an apartment building can be a big step forward in real estate investing. However, before you can take that step, it's important to have a firm idea of what the costs might be so you can ensure this venture will bring in enough rental income. To that end, use the figures above to give yourself a better idea of what you can expect to spend.