How much do you need to build an apartment? This is a question that many property owners and builders have asked themselves, but multiple factors go into the project’s cost.
There’s a lot more than just materials and labor involved in building an apartment—and the expenses can be huge.
It Can Cost Millions
The construction cost of a modest apartment building can run anywhere from $4.5 million to $50 million and depend on the location, size, and type of housing you want to build. You will also need to secure financing before breaking ground.
According to the National Association of Home Builders (NAHB), most homebuilders finance their projects with long-term, fixed-rate loans, which typically require 20 percent equity investment in addition to closing costs for acquiring land and development costs such as architecture and engineering services, surveying fees, and construction loan origination fees.
1. Development Costs
The total cost of developing real estate generally includes site acquisition or land preparation. However, it does not include the value of the land. Instead, it represents what it will take to get a project ready for construction and occupancy.
This typically includes the cost of obtaining site control, preparing the land, and building any necessary utilities. It also includes fees associated with:
• Planning, design, and permit costs
• Architectural and engineering services
• Legal fees
• Permit fees
• Lender’s title insurance premiums
• Contractor’s title insurance premiums
• Loan assumption fee premium (if applicable)
• Recording/registration fees (i.e., transfer taxes)
• Survey charges
• Utility connection charges
• Development-related inspection charges during the construction period
• Landscaping costs (grading, drains, sewers, or creeks)
• Security gate installation/repair at clubhouse/pools/tennis courts (interior and exterior)
Even at this stage, though, apartment builders can already consider cost-saving measures. One of these is hiring an expert familiar with Section 45L energy-efficiency certification.
Section 45L refers to a part of the IRS code that grants tax credits to different housing units that meet the criteria, including energy-efficiency requirements. If the property passes, the owner can claim $2,000 per unit. If an apartment has, say, 10 units, then the total tax credit is $20,000.
2. Construction Costs
Construction costs depend on the type of construction you choose but typically include:
• Development fees and permits
• Contractor’s fees for general conditions, engineering, grade work, and foundation
• Excavating or hauling fill dirt to the site
• Excavation expenses such as drainage systems installed during the grading process
• Gravel walks and driveways
• Installation of retaining walls/fences/chain-link fencing/gate posts/piers/trees-shrubs-landscape planting (including irrigation)
• Building a house pad or paved parking areas including curbs and gutters, if necessary
• Site paving around the home for ingress/egress (asphalt, concrete, or interlocking brick pavers by a licensed installer with all necessary permits)
• Driveway gate post installation, including wiring and/or air-conditioning units
• Installation of gas service from street to home (if applicable)
• Installation of a septic system or a community sewage treatment system (CSTS), if necessary
• Excavation for a septic mound, aerobic treatment unit, or an on-site sewage facility with all necessary permits
• Construction of the water well and pump, including hydrostatic testing and pumping at required depths as determined by county code officials
• Trenching for cable television line installation from the curb box to home site for multiple dwelling units only (if other-type uses have been approved, standard drop wire must be installed unless waived by appropriate governing authority)
• HVAC ductwork, from the furnace to basement ceiling penetrations through roof soffit or side eave, if necessary
• Installation of an interior sprinkler system or automatic fire extinguisher system
• Miscellaneous items such as temporary electric service, site cleanup, and restoration, including grading for drainage, erosion control, and seeding, landscape restoration (re-sodding)
• Guardrail posts if required by the code official
• Removal of stumps/roots on the property
• Contractor’s fees at closing
3. Financial Costs
You will need to consider some additional costs before breaking ground on your new construction project. These include:
• Transaction costs like real estate commissions
• Legal expenses incurred during negotiations for acquiring land and building permits
• Loan origination fees charged by lending institutions that offer long-term, fixed-rate mortgages
• Title insurance premiums required by lenders for protection against financial loss resulting from defects in the owner’s legal right to the title
• Closing costs such as title search, loan fees, and taxes
Financial planners will also suggest that you consider inflationary factors, i.e., how much money will it take to go shopping for a home ten years from now? You should give serious consideration to this factor because all homes are built assuming that they won’t have to be replaced anytime soon.
If your building plans are on schedule, you should start saving for your future facility expenses now. That way, when the time comes to buy materials and pay contractors, you won’t have any difficulty fulfilling your obligations or making timely payments on your loan(s).