Replacement cost is the estimated dollar amount required to rebuild a property from the ground up using current materials, labor, and construction standards, rather than the price the property would fetch if sold. It differs from market value, which reflects what a buyer would actually pay, and from depreciated or book value, which accounts for the age and wear of the existing structure. Replacement cost is calculated by estimating per-square-foot construction costs for the building type and location, then adding site work, permitting, and soft costs such as architecture and financing.
Insurers rely on replacement cost to set coverage limits, since a policy priced below true rebuild cost could leave an owner underinsured after a total loss. Investors use the figure differently: comparing a property's purchase price to its replacement cost helps gauge whether an asset is being acquired at a discount to what it would cost to build new, which can indicate limited new supply risk and support the case for existing assets in a given market.
Further reading: Because You Built This
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