Investing In Assisted Living Facilities

Assisted living facilities is a great property type to start learning about if you are an investor looking to branch into investments which provide increased ROI.

As a commercial real estate broker, I have worked with all types of investors; from the newbie investor buying their first rental property, to developers that are worth hundreds of millions of dollars. One trend that has really caught my attention over the past couple of years is the increasing number of investors earning extraordinary returns by investing in assisted living facilities.

When I got involved in my first assisted living deal I didn't think of it at all as a real estate investment, but more of a specialized medical business requiring the owner to either be a medical professional or a large corporation. However, as I got through that first deal and started getting involved in more, I quickly learned that that's not the case at all. I've found that, for the most part, there are two types of assisted living facility owners; ones that can barely get by, and ones that are making an incredible amount of money. The real interesting thing about that, though, is the ones who are making the huge returns aren't the owners with medical backgrounds, but the real estate investors turned assisted living owners.

Of course, there are licensing requirements and an obvious increase in liability, which varies depending on the local state requirements, the type of facility, and the size of it. However, that doesn't necessarily mean you have to become a hands-on assisted living operator in order to take advantage of the huge returns. There are three ways that I’ve seen investors get involved in the assisted living industry:

Become an operator

This one may seem obvious. If you have a medical background, or want to get involved in the day-to-day operations, you can go through the steps necessary to become licensed, buy a facility, and start managing it.

Hire an administrator/ manager

In most states, assisted living facilities are required to have a qualified administrator overseeing the operations to ensure the residents are being cared for properly. This doesn't mean the owner of the facility has to be the administrator, though. Many assisted living facility owners take a more passive role and hire an administrator just like they would hire a property manager for their apartment building. They still keep an eye on what's going on, but they're not active in the day-to-day operations. Some investors hire their own administrator/ manager, while others contract with another company to operate the facility.

Partner with, or lease to, an operator.

There are operators of assisted living facilities out there that don't own any of the real estate they operate in. Instead, they partner with, or lease from, investors who only want to be involved in the real estate side of things. There are two ways I've seen this work.

1. The investor and the operator enter into a commercial lease agreement for a set term, usually five or more years, for a set rate. The investor simply collects their rent check each month like they would with any other single tenant commercial property.
2. Each resident of the facility has a lease directly with the investor, and a separate care agreement with the operator. In this scenario, the investor earns all of their money from resident leases, and the operator earns their money from the care agreements without having a lease payment of their own to make.

The main difference between these scenarios is the amount of risk versus the reward. When leasing directly to the residents, the investor has the risk of having high vacancy during certain months but receives a much higher income when the property is full. When doing a typical commercial lease with the operator, the investor has the benefit of a steady income stream for the length of the lease but doesn't get the upside from the months of full occupancy.

Do I recommend jumping right into assisted living facilities? Of course not. There are a lot of local and state regulations involved, increased liability, and having to learn a lot about a completely different property type. Each state has their own set of rules, regulations and requirements for assisted living facilities, so you must work with a professional familiar with the regulations in your state to determine if this is an asset class for you to consider investing in. For investors that are willing and able to take on a riskier investment, and want to explore options to increase their ROI, I think assisted living facilities are a great property type to start learning about.

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