I'm in the process of closing on my second deal. I have an 8-unit apartment and soon 4 duplexes. Both are Class C properties. Because I require lending I struggle to make the numbers work on Class A properties (how do people do it?!).
I would like to move up from Class C properties this year or next so I'd like to consider building rather than buying. I was told a rough new construction estimate is $80/sqft for a wood frame apartment 4-stories or less and $115/sqft for steel frame. Is this accurate?
Can anyone share/recommend an estimating formula or technique for calculating new construction costs? It would be in Indiana - outside of a city, not in the city. From what I've seen IN/KY/OH/MI/TN/MO/IL are all similar in terms of cost of living / construction.
Thanks for the help!
I can't help you with construction costs, but I can regarding the Class A properties. These are usually bought by institutional investors that don't require a high return, and they buy with a relatively low LTV %. They also buy in Class A locations, which typically have higher appreciation, helping to offset the lower cash on cash returns.
Thank you @Sam Grooms - that makes sense. I've seen several Developer/GC's downtown Indianapolis build new and sell to institutional investors immediately after reaching full occupancy. Seems to me a great strategy but boy does it involve serious money. Hope to be on that level one day!
@Ali Hashemi My company builds larger apartments (100+ units), so this ratio may not apply. We're currently seeing our constructions cost around 60% of the total project cost. Not sure if your pricing is in all-in cost, or just the construction, but you'll see costs for architectural, civil, MEP, landscape, and other engineers, as well as interior design, permitting, utilities, accounting, legal, and others.
If you've never built before, be ready for a much longer process than you're used to with buying. Not sure about your markets (I'm in Texas), but working with the city/county for zoning, permitting, etc. can take many months, even years. That's all before you start construction!
It's a really fun and lucrative world if you decide to build, but it's a much bigger and riskier headache than buying for sure.
The developers you're seeing who sell after achieving full stabilization are more commonly known as merchant builders. I prefer to build the deal, refinance from construction debt to permanent financing, and operate the asset for several years, but that's just my preference.
@Bryant Patterson Thank you for your insight.
You say construction costs are around 60% of total project costs, what is the rough total project cost for a 100unit complex?
Or I'm curious what do construction costs break down to in terms of $/unit for a 100unit complex?
I think you should write a book on the BROS method...(build - refinance - operate - sell). When you're ready to BROS in Indiana, I'll bring the sweat equity!!
Total project costs range from $150k-$180k/unit depending on the size of the project. Lately, we've been building around 180 unit deals, so we're able to get better economies of scale on some of the expenses than smaller projects. Again, these are mostly in Texas, and these are very nice buildings with granite counter tops, stainless steel appliances, ridiculous pools, and an 11,000 SF clubhouse. Depending on your market and what you're looking to build, you may see lower costs.
I'm about to lead the development on a deal for the first time, so maybe I'll write the book then!
$80 sq ft seems like a good estimate to me on construction costs. Plus land, soft & holding costs. If you are outside the city, you definitely want to check on utilities. New septic systems can be crazy now a days depending on your soils. And I wouldn't want to build million dollar project with a well. Electricity can even get expensive to make sure there is enough power. And I ran into an issue selling somewhat higher end houses in a rural area because the internet ports were all full for that area. Access to fast internet is a must, or be prepared to have a much smaller client base
@Ali Hashemi I can't help you with construction but you could meet up with a local builder to get a rough idea for the market your in. I would suggest staying with B/C class assets as your able to add value and force appreciation. With class A, yes you may not have to remodel or do work to it but your also not reaping the benefits of forced appreciation thus taking away the unknown of the current market cycle.
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