If you already own real estate and want to dip your toe into development, you are probably wondering, “How much does it cost to build an apartment complex?”
The process of building an apartment complex can often seem arduous and overwhelming, as there are a number of steps involved, various factors to consider and many contractors to hire.
However, once you’ve done your research and are armed with the knowledge of how to embark on this process, those steps can become far less overwhelming. Understanding apartment complex costs and factors will help you get started on your project so you can build your own successful apartment building.
What Is the Average Cost to Build an Apartment Complex?
As of 2020, the average cost to build an apartment building in the United States was around $22 million, but that figure varies widely depending on location, type of building, construction costs, number of apartment units, square feet per apartment, and more. Although one can calculate a national average, the costs from one apartment building to the next end up being wildly different.
Travis D’Amato, Managing Director at Walker & Dunlop Investment Sales based out of Boston, said, “I’ve financed deals this year that cost $300,000 a unit to build, and there’s deals I’ve financed this year in the same sub-market — in Boston metro — for $600,000 a unit to build.”
According to D’Amato, there is no straight answer regarding the cost of building an apartment building because different locations and markets have very different construction costs.
Factors to Consider When Building an Apartment Complex
When trying to determine your own costs and profits, there are a number of elements to think about and consider.
Location and Land Costs
Location is perhaps one of the most important factors to think about when determining the apartment construction cost. According to the Metropolitan Policy Program at Brookings, a nonprofit public policy organization, land costs account for 10% to 20% of the budget, and local cost has a great deal to do with that percentage.
Purchasing land in urban areas, for instance, will cost more than land in rural areas, and the specific city makes a huge difference as well. A primary city like New York will have much higher prices than a secondary city like Denver.
Another factor to consider is how easy or difficult it is to get zoning permits for apartment buildings, D’Amato noted. In some cases you can buy a “permitted site,” in which someone else already obtained all of the approvals to build apartments. D’Amato gave the example of a piece of land that’s already permitted for the construction of 200 apartment units that you’re going to buy.
However, there are also pieces of land that are not currently zoned for multifamily units, and you might buy it with the intention of getting permits and zoning approval yourself. Unfortunately, that’s not always the easiest undertaking.
“I sit in Boston, and I cover New England, Connecticut, and it’s really difficult in Massachusetts to get a piece of land that is not multifamily permitted,” D’Amato said, the reasons being “regulatory issues, political issues, ‘not in my backyard issues.’ [Housing] is not something that Massachusetts generally wants a lot of. It’s all town by town.”
D’Amato added, “The hurdles to getting a site permit in Massachusetts are very difficult.”
So when purchasing a piece of land that’s not already permitted for an apartment building, you might want to do your research about the process of getting zoning permits in your location.
“The initial consideration is how hard is it to get permits? How long is it going to take? What is the process I have to go through? Do I need to have political connections? How much money am I going to spend? Do I have that money?” D’Amato explained.
Affordable Housing vs Luxury Apartments
When building an apartment complex, you also need to figure out if you’re creating affordable housing, a luxury apartment building, or both. The construction costs to build both are relatively similar, depending on the amenities you include in the apartment building, but affordable housing has lower rent. For that reason, most cities in the US have inclusionary zoning policies, “which means in order for you to build market rate housing, you have to build some affordable housing with it,” D’Amato said. Different cities have different policies in terms of how many of your apartments need to be affordable, as well as the cost of rent per square foot.
Because of inclusionary zoning policies, some affordable housing is forced, “and so your market rate rents need to make up for the fact that you also have restricted rents,” D’Amato said.
With affordable housing, the rents usually don’t justify the costs. However, governments provide financial incentives to “bridge the gap,” D’Amato added. There are tax breaks, subsidies, density bonuses and cheap financing available when it comes to affordable housing. Be sure to do your research on inclusionary zoning in your area to figure out your costs and overhead when it comes to affordable housing vs. luxury apartments.
Cost of Materials and Labor
Once you’ve figured out your land costs and permits, you can start calculating the cost of material and labor, which is often referred to as “hard costs,” or as D’Amato noted, “the physical cost to put up the building.” The costs of materials, labor and contractor fees will make up a majority of your budget.
Additional Fees, or Soft Costs
Your budget should also account for costs such as architectural fees, legal fees, interior design fees, furniture, fixtures, and equipment (FF&E), and any other supplemental fees that you might encounter along the way. According to Brookings data, those fees could amount to 20% to 30% of your total budget.
Equity and Returns
When embarking on the process of building an apartment complex, you also need to consider the amount of equity you have and whether you will get a good return on your investment to “justify development,” D’Amato said. “When I say justified development, I mean you’ve got to finance it, you’ve got to find equity for it, and you’ve got to make a profit. If the deal doesn’t work — if it’s too expensive to build, and you can’t hit the right returns … you’re not going to want to build it.”
So, before you begin building, look at the rental market in your area to determine your projected return on investment. D’Amato pointed out that right now, rent prices are skyrocketing across the country, but as a result, construction and labor costs are going up as well. So be sure to calculate your equity and potential returns to determine whether your expenses are justified and will lead to profit.
Expected Occupancy Rates
A very basic factor to consider when building an apartment complex is your expected occupancy rate. How many apartment units are you building, and do you expect to quickly fill those units? How much will you charge per square foot? You should look at similar buildings in the area to figure out occupancy and vacancy rates.
Who Is Involved in Building Apartments?
A wide variety of people are involved in building apartments, including attorneys, architects, contractors, engineers, plumbers, electricians and, in some cases, investors and outside financiers, with the architect and general contractor making up the majority of the labor costs.
The architect typically creates the building plans and the initial budget, oversees the hiring process, finalizes drawings and selections of materials, fills out construction paperwork and acts as the project manager during construction. The contractor will supply the materials, complete the contracting work, bring on subcontractors, deal with permit issues and clean up the job site once the work is complete.
You’ll need real estate attorneys to help with any legal zoning matters, as well as with drawing up contracts, and environmental engineers to oversee land development.
There Are Many Parts Involved With Building an Apartment Complex
As with any real estate deal, it’s a good idea to keep a list of all of the steps involved and people you need to hire when building an apartment complex, just so you can stay organized during construction and not skip over anything essential. Look at comparable buildings in your area to determine how successful they are, what they charge in rent per square foot and what the occupancy rate is so that you can make informed decisions about your own building. Paying attention to the factors listed above will help you find success when building your apartment complex.