Construction costs explained

When building an investment property, you must budget for both the construction cost and any other surprises. While every property is different, gaining a ballpark figure of the cost of constructing an investment property can help you build the best-suited property possible.

In this article we will explore:

• What are construction costs?

• Construction cost calculations explained

• Regional variations and construction costs

• How do construction costs help investors?

• BMT Tax Depreciation is the specialist

What are construction costs?

Construction costs can be estimated for any number of property types, including residential houses, units and apartments, townhouses and duplexes and commercial buildings. Construction costs provide a guide of costs for construction and can be as detailed as required. Construction estimates usually range in detail from a preliminary estimate which is based on rates for the various building elements to a very detailed cost plan that identifies all individual materials and installation costs.

Some of the key factors that impact construction costs for residential buildings include the type, level of finish, availability of materials, site conditions, current demand levels and the region it’s built. A specialist quantity surveyor is one of the few professionals that can calculate construction costs for property depreciation purposes.

Construction cost calculations explained

The BMT Construction Cost Table is a useful guide and calculates costs based on the Gross Floor Area (GFA) rate.

The GFA rate is based off two important elements. The first being the Fully Enclosed Covered Area (FECA) that includes items like staircases, basements, columns and piers.

The second element of this rate is the Unenclosed Covered Area (UCA) that includes items such as roofed balconies, attached covered walkways and porches.

Generally, the GFA rate is the sum of both the FECA and UCA floor area of a building as a square metre rate.

Regional variations and construction costs

A building’s construction cost will change depending on its location. For example, you wouldn’t expect to pay the same amount for a build in a major city such as Sydney as you would in somewhere more regional like Cairns. This is because region pricings vary based on supply, demand, land type, resources and trade availability.

The BMT Construction Cost Table is based on the Sydney region, however percentages are available to allow for regional variations.

How do construction costs help investors?

There are three key ways that understanding construction costs can help investors.

1. Depreciation

As discussed, a specialist quantity surveyor is one of the few professionals recognised as having the skills and qualifications to estimate construction costs for depreciation purposes.

The structural part of a build, like walls and mortar, are depreciated using capital works deductions. On average, capital works make up 85 to 90 per cent of total depreciation claims.

2. Insurance

Holding suitable insurance on your investment property is crucial.

Fundamentally, your property’s insurance should cover its construction cost, or replacement cost, if it was destroyed. If your insurance doesn’t cover this cost, you are underinsured. Unfortunately many find out that they are underinsured too late and the consequences can be costly.

Contacting an insurance specialist with access to comprehensive construction cost data is the most effective way to protect your investment against underinsurance.

3. Budgeting

It almost goes without saying, but building a property is a large expense. Accessing a guide of construction costs, down to the square metre, can help you in the very early stages of planning your budget.

BMT Tax Depreciation is the specialist

BMT’s extensive experience and construction cost knowledge ensures that all depreciation deductions are maximised correctly. To learn more about depreciation and how BMT can help you maximise the cash flow form your investment property, call 1300 728 726 or Request a Quote.