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5 questions for the smart senior housing investor

Five questions to ask before you invest in senior housing 

  1. How do lenders evaluate senior housing facilities vs. other multifamily properties?
  2. What type of facility should I invest in?
  3. How involved do I want to be in the management and operation of the facility?
  4. Should I build a new facility or purchase an existing one?
  5. What types of loans are available?

When it comes to investing in senior housing, the numbers are attractive: By 2029, more than 20 percent of the U.S. population will be over the age of 65, according to the U.S. Census Bureau. Coupled with a steadily increasing life expectancy and a range of challenges with providing long-term care, investors are bullish about the senior housing market.

Investing in senior housing requires in-depth research and strong legal counsel, arguably more so than a typical multifamily real estate investment. Ask yourself these key questions when assessing senior housing as a potential investment.

1. How do lenders evaluate senior housing facilities vs. other multifamily properties?

Commercial real estate lenders in general look at the borrower’s credit and finances, as well as the income potential of the property in question. With senior housing, however, a major part of loan eligibility includes the borrower’s experience in owning or operating senior housing or a comparable facility. The fact that senior housing is often both revenue-generating multifamily real estate as well as a medical facility complicates loan underwriting criteria further.

Unlike other multifamily or commercial properties, lenders do not use standard real estate valuation models for senior housing; projects are assessed on a case by case basis. Lenders assess the same factors as they would for a standard multifamily facility within the context of senior tenants. For example, occupancy percentage and rent roll is relevant to both a standard apartment and a nursing home, but the latter has a higher turnover risk. Similarly, labor costs for an apartment might comprise just a few employees as opposed to the specialized caregivers required for a nursing home. Underwriting requirements differ based on the type of senior housing in question.

2. What type of senior housing should I invest in?

There are four types of senior housing facilities, each carrying their own risks and opportunities.

  • Independent living. Designed for autonomous seniors, independent living facilities generally offer no specialized medical services, and aren’t subject to senior-targeted regulations or licensing. Since they operate much like any standard apartment complex, they are considered low-risk investments, but face high market competition and inconsistent occupancy rates.
  • Assisted living. Assisted living facilities cater to seniors who need assistance with activities and medical care, but are otherwise self-sufficient. There are no federal regulations for assisted living facilities, but state regulations typically apply. Assisted living facilities have steadier occupancy rates and are considered stable investments.
  • Nursing care. Round-the-clock licensed nursing care is provided here, and these facilities must comply with state and federal regulations. While considered high-risk investments, market competition is lower, and there is good potential for high returns.
  • Continuing care retirement communities. These facilities offer different levels of care in one community. Regulation, occupancy and investment risk depend on the services provided.

Memory care, or Alzheimer’s care, is another type of high-level senior care that can be a stand-alone facility or part of an assisted living or nursing care facility.

3. How involved do I want to be in the management of the senior housing facility?

Managing and operating senior care facilities requires significant skills and knowledge. Regardless of whether you hire professionals to manage a new facility or plan to purchase an existing operation that has management staff in place, a detailed analysis of the operator is necessary to ensure that the business will provide quality care and comply with regulations while generating anticipated profits. Whether you want to be a passive investor or hands-on in the management of the facility, you ultimately could be liable for mismanagement or injury that occurs on the property, so it is important to vet everyone involved in the business.

4. Do I want to build a new senior housing facility or purchase an existing one?

Constructing a new senior housing facility is undoubtedly more complex than purchasing an existing one. In addition to the standard challenges of a large construction project, most senior housing carries specific regulatory and design considerations for accessibility and health care. New construction of assisted living, nursing care and memory care facilities are subject to state and/or federal regulations. It can take a year or more to present the business case to the state, pass health and safety inspections and obtain the necessary government approvals. Due to these additional steps, working with a senior housing management company and experienced developer in the market is imperative to a successful new build project.

Licensing is another major consideration, regardless of building or buying. Each type of facility has different licensing requirements. Independent living facilities somewhat mirror typical multifamily properties, while assisted living facilities are slightly more regulated. Nursing care facilities, however, need a new license, which can take six to 12 months to issue. Before operations begin or transfer, you’ll also need new Medicare and Medicaid provider numbers, which can be a lengthy process as well. Continuing care retirement communities may require multiple licenses depending on the care being provided.

Given the length of time to get new licenses in place, senior housing sales typically include an Operations Transfer Agreement giving the buyer the right to manage the property alongside the seller until the new license is received.

In building or buying a senior housing facility, legal counsel is paramount to ensure you are compliant with all codes and laws throughout the process.

5. How will I finance the investment?

Your loan options when financing a senior housing development or purchase depend on the type of facility in question. The most common forms of senior housing financing are U.S. Department of Housing and Urban Development/Federal Housing Administration Section 232 loans; special senior housing loans from Fannie Mae and Freddie Mac; or financing from life insurance companies.

For the right investor, senior housing can be a stable and profitable asset. It will take serious due diligence, however, so ensure you build a seasoned team of lenders, attorneys and managers.