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Senior Housing 101

If you’re an investor looking for property with a guaranteed demand, look no further than senior housing. With 55 million older Americans searching for homes by the year 2020, the market for this type of housing is huge and growing exponentially every year. But investing in seniors isn’t just about property; it also demands a decision about how involved you want to be in a business that requires knowledge of both the hospitality and health care industries. Whether you want to run a senior living property or just buy one and hand it over to a someone who is qualified to handle the daily operation of the facility, this type of investment will require you to have a clear understanding about the different types of senior properties, from independent living apartments to full-on nursing homes. With a solid business plan and well-researched knowledge of investing in senior housing, you can decide just how hands-on you want to be in this high demand market.

Four Different Choices

There are 50,000 senior living communities in the U.S. They are divided into four different types: independent living complexes, assisted living communities, skilled nursing facilities and continuing care retirement communities.

Independent living facilities operate much like any other multi-unit complex except that they are marketed explicitly to people in their golden years and usually offer communal dining, housekeeping and transportation. For these services, property owners usually add about 10 percent to traditional multi-family unit rent. Perhaps because of the growing needs of seniors who require more comprehensive care, independent living centers make up the second smallest percentage of the market with about 10 percent of the share.

Assisted living communities have the largest chunk of the market with about half of facilities meeting this classification. Seven million people over age 65 and half of those over 85 require the type of support that these centers offer, such as laundry and food service, arranged activities, limited medical oversight and assistance to those with less mobility, blindness or other impediments. A sampling of the 38,000 assisted living centers around the country reported that the average cost for a private room in 2006 was around $2,600, a number that already climbed to a little over $2,700 by 2007. Although most industry groups report similar averages for the cost of assisted living care, what residents pay will be heavily influenced by the level of service they receive -- costs can reach up to $4,000 a month for those in need of advanced care. The biggest trend in these centers is to make them feel less institutional and more like home by providing more community space so residents spend less time cooped up in their rooms. Following this trend has netted bigger profits for other investors and it’s a smart bet for newcomers to the senior housing market who want to increase the demand for their properties.

Skilled nursing communities are commonly called nursing homes because they provide around-the-clock care for seniors who need intensive medical attention. Patients in nursing communities not only need medical help but generally rely on staff for all daily tasks such as bathing, dressing and going to the bathroom. Since the standard of care at a nursing home is a little more predictable than at other facilities, costs haven’t changed as much from year to year, averaging $6,000 a month nationally for a private room. This type of community currently has about a third of the market but could grow as medical technology continues to advance, helping more people live well beyond their 70’s and 80’s. Although the nursing home market may be ripe for growth, experts warn that unless they have a background in healthcare, investors would be wise not to take their first foray into senior living investing in this type of complete care environment.

Continuing care retirement communities are usually put in the “other” category because they offer blended levels of service including independent, assisted living and nursing home care all on one campus or site. These sites differ from other senior homes because they require a long-term contract from residents. There aren’t many industry standards for pricing, since the type of community and the level of service delivered vary so widely -- so do your homework to find out what you should charge in your area.

The Business

Since you’ll be responsible for the health, well-being and, in large part, the happiness of people’s parents and grandparents, purchasing property geared toward seniors is not only a real estate investment, but also a hospitality and health care business. Experts say that successful investors in senior living will have broad expertise in real estate, but will also know what it takes to operate the facility. Even if you plan to remain a silent partner in the deal, only owning the property, you’ll need the knowledge to ensure that competent people are in the driver’s seat, since you could be ultimately liable for the inherent risk that comes with the medical and assisted care industries. There are several companies that specialize in delivering senior care who know the requirements from state to state to run such a facility. The services they offer also include:

• Market analysis
• Operational analysis
• Site analysis
• Planning/zoning requirement analysis
• Local/state safety and construction code analysis
• Advertising and marketing
• Facility management

Zoning and Other Regulatory Issues

One of the reasons for choosing an outside, experienced firm to run a senior living home is that the requirements for the construction, maintenance, and management of the properties varies depending on the state, city and level of services offered. Nursing homes are licensed and have oversight from the federal government, but assisted living centers are bound by state and local regulations. If you plan to build a new property, expect the process of approval from the state and local government to take a year or longer. You or your management company will need to use your market research to show state officials that there is a need for such a facility and get zoning approval, which includes constructing or renovating your building according to the demands of the local authorities. You’ll also need to plan for multiple visits from health inspectors, the fire department and other city agencies. When it comes to proving you’re up to the task of running the home, states have different regulations but most require that you or the director running the facility take up to a week’s worth of training in operating an assisted living site. You will also need to continually update the state’s licensing agency on the menu, activities and staff at your facility. Many investors will have already filed as a limited liability corporation before they move into the senior housing market but if you haven’t, that type of structure is recommended to shield investors from the many legal troubles associated with running a health care business. A few of the other options for structuring your business include: a sole proprietorship, a partnership, or a corporation. You are well-advised to consult with an attorney and tax professional to find out which entity best fits your circumstances.

Financing

The financing for senior developments is similar to other commercial financing arrangements in that lenders will primarily consider the income and projected cash flow of the business. However, two fixed costs – staffing and meals – are unique to senior living facilities and also form the biggest chunk, about 17 percent, of monthly expenses. Some experts maintain that when it comes to facilities that have staff and meals incorporated, it is advantageous to have more units so the investor can spread around some of the costs, including insurance, that will come with running any size assisted living, nursing or continuing care home. Owning a larger home, say, with 80 units, will have larger upfront costs though, averaging about $11 million including land, construction, equipment and marketing. The good news is that even after investors pay costs such as insurance, property taxes, activities, staffing and maintenance, senior housing still offers a chance at a good monthly stipend, with an average reported operating income of up to 30 percent.

Armed with the knowledge that a market full of potential consumers is also filled with other investors looking to tap into the growing demand, the savvy investor will find a property that stands out from the pack. While the senior housing market is a huge undertaking not to be entered into lightly, with some smart planning and good business sense, senior housing will make a wise addition to any investor’s portfolio.