What To Look For In Senior Living Investments
What is Senior Housing?
In the broadest sense, senior housing is any housing arrangement for individuals over the age of fifty-five. Senior housing encompasses independent living communities that do nothing but restrict residence to people fifty-five years of age and older. In these communities, some residents own their homes, and some rent. These communities can comprise single-family homes, townhouses, condominiums, mobile home parks, or apartments.
Senior housing extends from these independent living communities to the other end of the spectrum, where intensive on-site care is provided to residents. In short, any accommodation that in any way caters to individuals fifty-five or older is considered to be in the senior housing sector.
As the baby boomers become the largest aging population ever, demand for senior housing is expected to grow. Demand for senior housing creates a growing opportunity for real estate investors. The growth of the baby boomer aging population is not likely to reach its peak until 2030. Therefore, Investing in senior housing is projected to bring excellent returns for at least the next decade.
Types of senior living facilities
There are 4 basic types of senior living facilities.
Independent Living Facilities
The independent living segment of the senior housing business is further broken down into smaller components. The segments are categorized based upon the level of services and care provided.
Senior cohousing is an age-restricted 55+ community. Some 55+ communities offer no services. The residents in these communities live entirely independently. In many of the 55+ communities, the residents own their homes. There are 55+ communities where Home Owner Association (HOA) covenants require homeownership and disallow rentals.
HOAs govern senior cohousing communities. The cohousing communities can be found in single-family home neighborhoods, mobile home parks, condominiums, and townhouses.
The senior cohousing segment provides opportunities for commercial real estate investors. Apartment complexes can be designated as 55+ communities, and the units can range from efficiency to three-bedroom/two-bath apartments.
The 55+ designation does not require the real estate investor to provide any additional services above what would be expected in a non-55+ apartment complex. Services such as housekeeping, laundry/dry-cleaning, or shuttle service to shopping and medical appoints are optional. Adding these services provides the opportunity to increase NOI.
Senior Group Home
Senior group homes, sometimes referred to as Active Living Homes, are designed for seniors to live as roommates. The design of senior group homes varies depending on the class. The A-class homes provide private rooms with shared common living space. The units range in size from two to four bedrooms. Senior group home facilities are similar to student housing complexes.
Housekeeping and meals are provided in senior group homes. Meals are communal, as is the case for student housing. Medication reminders are generally a part of the service, though no health care provider is on staff to monitor the intake.
In senior group homes, no staff beyond food services and housekeeping is required. Management expertise is not significantly greater than for student housing. Senior needs are different than student needs. A manager experienced and with knowledge of the senior population is critical.
From a real estate investor perspective, both senior cohousing and group homes can deliver exciting opportunities for excellent returns on investment. In both categories, revenues are primarily generated from rent. Value-add opportunities exist by adding additional programming and amenities. These can include up-scale restaurant-style dining to recreational programming. Amenities such as box rooms, exercise rooms, computer centers, and pools can also add to the NOI through increased rents.
Assisted living facilities (ALF) provide twenty-four/seven care. These facilities provide for extenuating physical needs, medical services, and rehabilitation therapy. Though these facilities can provide service for anyone with mental or physical disabilities, the focus is serving senior living needs. Care extends to helping residents use the bathroom, dress, bathe, and take their medications.
Most AFLs are independently owned and operated. Though independently owned, they do partner closely with hospitals and other medical institutions. Licensed nurses and medical practitioners are required. ALFs are closely regulated.
Skilled Nursing Care
Skilled Nursing Care (SNC) facilities are more intensive care providers. SNCs tend to be more institutional in style than AFLs. Though traditionally institutional, these facilities are moving toward becoming more homelike. SNC facilities provide more intensive care than AFLs. Seniors with the most extensive care needs are referred to SNCs.
Memory care is a specialty senior living long-term care area service. Memory care units can be standalone units but are often integrated with AFLs or SNCs. Memory care facilities require 24/7 licensed medical staff.
Continuing Care Retirement Communities
Continuing Care Retirement Communities (CCRC) provide an all-encompassing range of services from senior cohousing to SNCs. These communities are designed for seniors to enter the community at the most independent level. As the residents, age additional care and services are provided as the senior’s needs dictate.
How can you invest in senior living real estate?
Investing in senior living real estate is not unlike any other commercial real estate investment. Investing in senior cohousing is just like investing in any other multifamily apartment. The only difference is the 55+ age restriction for residents.
An investment in a senior group home is much the same as investing in student housing. The difference is the age of the resident. With life expectancies rising, the expected stay in a senior group home is also advancing to an average of four years. Student housing has a much more transient population and a higher cost of turnover.
All strategies for investing, purchasing, and holding multifamily apartments can be employed for senior living investments. For information on how to invest in senior living facilities, see the post Best Tips to Start Commercial Real Estate Investing.
One avenue to consider for investing in senior living is a Real Estate Investment Trust (REIT). These specialty REITs exclusively hold senior housing assets. Senior living REITs offer a low capital investment with a low-risk opportunity to enter the senior living investment sector.
Investing, owning, and operating senior independent living facilities is not much different than any other real estate investment. Owning and operating assisted living and memory facilities is different. Not only is investing in ALFs a real estate investment, but it is also an investment in a business. Operating an ALF requires a high level of specialized management knowledge and expertise.
There are two ways to deal with the management issue.
The least risky is owning the facility and renting it to a private operator skilled and experienced in running ALFs.
The other option is to own the facility and operate the business. Owning the facility can be more lucrative, but it comes with much more liability and risk. Choosing this requires an in-depth understanding of the laws and regulations that govern the operations of an ALF. One must have considerable knowledge of the customary practices of ALF operations to provide the necessary care for a well-run facility.
Investing in Senior Housing
The COVID pandemic exposed problematic issues in the senior living facilities. A massively disproportionate share of COVID deaths was associated with senior living long-term care. It is too early to tell the long-term effect this will have on senior living investments. It is almost certain that there will be regulatory change. The changes that are coming may be very costly and will impact the business’s bottom line. The impact on the bottom line will affect the return on investment.
Licensing and Regulation
Licensing and regulation are already extensive for the operation of assisted living facilities. Indeed, the licensing and regulatory environment will not become laxer. The probability of increased scrutiny is very likely. Increasing oversight will impact operational expenses that will impinge upon the NOI.
Operating ALFs is operator intensive and must be staffed with specialized, highly trained, and educated staff 365/24/7.
Senior residents are fragile and vulnerable. The fragility of senior residents increases liability. Even if the investor owns only the building and rents to the ALF operator, the investor has liability.
Falls are a significant concern for the elderly and thus a problem for the property owner. Slippery areas are a hazard. Potholes on sidewalks and walkways are potential liabilities. If the facility provides transportation, accidents can happen.
Underestimating Senior Living Business Basics
Investors notoriously underestimate the demands of the core basics of the senior housing business. The core of the assisted living business is offering 365/24/7 high-quality service and care for the residents. A successful assisted living business requires excellent care provided by well-educated, exceptionally managed, highly motivated, and licensed health care providers.
Senior housing has recession resilience
Senior housing is more resilient through recession than other investment classes because it is less reliant on external economic factors. The sifts in the job market have less affects on seniors than on other populations because the bulk of seniors are retired. Seniors’ retirement income is fixed with slight fluctuation regardless of economic conditions.
The senior population in the USA continues to grow at an astonishing rate. As the baby boomer generation ages, it is projected that the 2015 aging population of 47.8 million will explode to over 79 million by mid-2030. This amazing growth continues to create demand for more senior living facilities.
As the senior population continues to grow, the rate of new senior housing construction is stagnant. 2008 saw a decline in senior house new starts. The senior housing slump continued through 2011. 2019 brought an impressive increase in senior housing starts but 2020 the pace slowed once again. As senior housing starts languished, demand for senior living facilities and communities continues to increase.
The middle-income market for senior living housing is not even being addressed. This high demand and low supply provide extensive opportunities for developing assisted living businesses. The senior housing business is just on the cusp of towering growth.
Life expectancy increases
With continuing scientific discoveries, the field of geriatric medicine makes evermore impressive developments. The developments in geriatric medicine are increasing life expectancy. In the 1950s, the life expectancy was 45. Today the USA life expectancy is 75. Advances in medicine will continue to push life expectancy upward.
The upward movement of life expectancies will contribute to more extended occupancy periods for those going into senior living. The more extended occupancy periods will further stabilize the senior housing markets. Stabilized markets will be more attractive to senior housing investors.
Things to consider before you become a senior housing Investor
Prospective senior housing investors first need to recognize that the senior housing business is operationally demanding. Not only is the assisted living business intensive, but it is also intensely regulated.
Experienced management must be employed for a senior living investment to be successful. Management will make or break any commercial real estate investment. For a senior living investment management must be the first and foremost consideration. Management is everything as a competent manager will establish proven and regulation-compliant systems for senior living facilities to be a profitable investment.
Frequently Asked Questions about Investing in Senior Housing
Is Senior Living a Good Investment?
The PGIM’s report, A Silver Lining: The Investment Implications of an Aging World, states that the USA is projected to increase the senior housing supply by roughly 850,000 units by 2030. An increase in senior housing starts of this magnitude is good news for real estate investors. The opportunities are there for passive investors, active private investors, and large institutional investors. No investment is without risk, but there may be a tsunami on its way in the senior housing investment industry.
Is owning an assisted living facility profitable?
Owning an assisted living facility can be very profitable. The key to profitable senior living investing is the appreciation of the concept that it is first and foremost an intensively operational business. Skilled management and savvy investment decisions can make an assisted living facility investment very profitable.
What is a buy-in for assisted living?
An assisted living buy-in is a pre-payment that guarantees a prescribed level of care and services later. A senior living facility buy-in can be a good idea because of the value of time and money. A buy-in allows seniors to pay now for services and care not currently being used that will be more costly in the future when their health declines and those services are required.
Continued Care Retirement Communities often offer buy-in options. In some CCRCs, a buy-in is required. The assessed buy-in is prorated depending on when the senior comes into the CCRC in the health cycle.
Is senior living considered multifamily
Senior living facilities and communities cover a broad spectrum of possible living arrangements. The independent living facilities and communities generally fall under the umbrella of multifamily. Many of these independent living facilities are managed like any other multifamily complex. The senior group home component of the independent living cluster is handled similarly to student housing.
Assisted living facilities have multifamily investing components, but the facilities must be managed like operationally intensive businesses. If the investor owns the facility and rents to an assisted living business, this too can be considered a multifamily investment.
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About the Author - Dr. Allen Lomax
With careers in academia, podcasting, and real estate investing, Dr. Allen Lomax inspires us to break open our minds’ secrets to discover individual and universal well-being. Through passive real estate investments, he helps enlightened investors create time freedom to live abundantly in all life’s areas.