Investing in Senior Housing
The U.S. population is getting older. In 2000, 35 million people were over 65. In 2020, 54 million people were 65 or older. By 2040, data indicates 80 million people will be more than 65 years old. As the population ages, people need somewhere to live that can accommodate their needs as older adults. While some can age in place in their homes, others move into housing designed for older adults who need a higher level of daily care. The increased demand for senior housing creates an opportunity for investors who want to diversify a portfolio or start investing in real estate for the first time.
What Is Senior Housing?
Senior housing is any residence that accommodates older residents' needs. It can take many forms, from independent apartments in a community to rooms in a facility that provides round-the-clock care.
Types of Senior Housing
In some cases, people over 65 might choose to move to a retirement community while they are still relatively independent. As their health and needs change, they can move into housing that provides more specialized care. Here are some common types of senior housing.
1. Independent Living
Independent living communities are apartment-style units meant to provide living space and amenities for senior adults. These are often one- to two-bedroom apartments, complete with kitchens and laundry facilities. Residents can come and go as they please, cook their meals and care for themselves while receiving the social benefits of living in a community with other senior adults.
Supportive services are typically available to residents upon request. These services can include the following.
- Meals: Residents might be able to order meals from a cafeteria or enjoy table service meals at an on-site restaurant, or prepare food in their kitchens.
- Housekeeping: Independent living facilities might offer residents the option of weekly or daily housekeeping. A housekeeper can visit the apartment to dust, vacuum, change the bed linens and generally tidy up.
- Laundry: If they prefer, residents might be able to send their clothing and linens out for someone else to wash.
- Fitness classes and social activities: Independent living facilities often have on-site gyms, and some provide fitness classes, such as yoga or aerobics. Social activities, such as dance lessons or bridge nights, might also be available.
- Transportation: The facility might offer shuttle service, driving residents to local malls or shopping centers or otherwise helping them complete their errands.
Independent living communities usually offer these services to residents for an additional cost to their monthly housing fee. Some independent living facilities are strictly residential units, where senior adults live without the option of other supportive services. Often, people refer to these facilities as senior apartments.
2. Assisted Living
Assisted living facilities have multiple private units meant to house residents who are disabled or unable to live independently. In addition to coordinating visits from outside health care providers, assisted living programs provide supportive services to residents. These can include the following.
- Meals: As with independent living, residents in an assisted living facility can visit a cafeteria or restaurant. Depending on their situation, they might also get meals delivered to their room.
- Laundry: Laundry service can wash residents' clothing and linens.
- Housekeeping: Housekeeping staff clean residents' rooms.
- Medication reminders: Residents in an assisted living facility might receive phone calls or a visit from a nurse when it's time to take their medication.
- Assistance with bathing, grooming, eating, shopping and managing money: An assisted living facility can provide help with daily tasks as needed.
Because assisted living facilities are subject to state regulations instead of federal ones, differences exist between the services and level of care offered from one assisted living facility to the next.
3. Memory Care
Memory care facilities are licensed health care facilities that specialize in caring for senior adults living with Alzheimer’s disease, dementia and other cognitive impairments. These facilities exist to provide an assisted living environment for their residents to continue to live engaged, social and active lifestyles while on-site nursing staff meets their physical and emotional needs. Residents typically receive services that include the following.
- Activity planning to stimulate cognitive abilities: Residents might participate in group activities such as playing games or completing puzzles.
- Meals: Residents can receive meals in their room or might be able to visit an on-site restaurant or cafeteria.
- Assistance with personal care and medications: Nursing staff could help residents with basic grooming. They may also administer medications, as needed.
- Housekeeping and laundry: A housekeeper will tidy and straighten a resident's room and laundry services will make sure their clothing and bed linens are fresh and clean.
- Exercise programs: Physical exercise is as essential for people with memory difficulties as mental exercises. Exercise programs might include fitness classes, yoga or swimming.
- Transportation: Often, residents in memory care facilities no longer drive, so they need transportation to run errands or get to doctor's visits.
Additionally, these facilities are highly secured to protect residents who might be prone to wander. While many memory care units operate independently, others are special care units within a general assisted living facility.
4. Skilled Nursing
Skilled nursing facilities have licensed nursing staff 24 hours a day for patients requiring care and supervision. Often, these facilities offer rehabilitation and other specialized services to those recovering from an accident, surgery or other health issues. These services could include the following.
- Physical therapy: Residents might work with a physical therapist to regain or maintain the use of certain joints or muscles.
- Speech therapy: Speech therapists can work with people who have had a stroke or other medical event that has affected their ability to speak.
- Occupational therapy: Occupational therapists can work with older adults to help them navigate changes in their bodies, minds and living situations.
- Social services: Social services might include helping residents with Medicare and Social Security, arranging for transportation and providing nutritional counseling.
- Medications: Nurses are responsible for administering medications to residents in skilled nursing facilities.
These facilities more appropriately fall under the category of senior care rather than senior housing. A resident's stay is usually shorter-term, and they can receive a higher level of treatment than at other facilities.
5. Aging in Place
Though some people are happy to move into an independent apartment in a retirement community, others prefer to remain in their homes for as long as possible. Nearly 90% of baby boomers have expressed a desire to age in place. Often, a person will need to change their home to make it "aging-ready." According to the U.S. Census Bureau, only 10% of homes in the U.S. meet these criteria. Contractors who renovate houses to make them more accessible to people with limited mobility can allow them to stay independent longer.
6. Senior Co-Housing
Senior co-housing provides the best of both worlds for older adults. People who move into co-housing communities can live in a private residence and enjoy amenities, such as courtyards and other shared spaces. Co-housing has some features in common with co-ops or condominium complexes, but often places more emphasis on community and social activities.
Benefits of Investing in Senior Living
If you are considering investing in a retirement home or other senior housing, there are many benefits.
- It's needs-based: Often, when investing in real estate, the goal is to earn income from tenants. Senior housing is often needs-based, meaning the people who live there rely on the services and amenities it provides. Senior housing and care is the only commercial real estate asset class that experienced positive asking rent growth during the Great Recession. Rent growth has been steadier, less volatile and has generally exceeded that of other commercial real estate property types.
- It's relatively recession-resistant: Some investments rise and fall in value based on the overall economy. For example, the COVID-19 pandemic adversely affected the luxury rental market, but led to an uptick in demand for residential home sales. Older adults will always need housing, making investing in assisted living facilities and other types of senior housing relatively stable. Senior housing shows high rates of annual returns at the three-year, five-year and 10-year points. Even amid the Great Recession between 2007 and 2009, the demand for senior housing remained high.
- It has growth potential: The number of older adults in the population is increasing each year. Changes associated with aging, such as a loss of mobility or the development of chronic illnesses, can mean that more and more people are likely to look into moving to senior housing at some point in their lives.
Risks of Investing in Senior Living Homes
Any investment comes with risk. Here are some challenges to consider before you invest in senior living facilities.
- Illness and deteriorating health can cause concern: The pandemic shone a bright light on the risk inherent in communal living spaces. From a human-cost perspective, contagion puts many people's lives at risk. Many older adult residences didn't have the space required to reduce the risk of disease transmission. From a financial perspective, the pandemic increased the costs of operating many assisted living homes or retirement homes and highlighted the need for measures that contained transmission and kept costs down.
- Operating costs can be high: One survey found that 57% of investors in senior housing expected an increase in operating expenses due to COVID-19. Senior housing facilities now need to pay for personal protective equipment, enhanced cleaning and ongoing testing for staff and residents. Even without a pandemic, an assisted living facility's operating costs can be high. Usually, people who move into assisted living facilities or skilled care facilities need regular medical attention and nursing care. The residence must have trained staff on hand 24/7 to provide care and support when needed.
- The location could be an issue: "Location, location, location" is the real estate industry's mantra. A retirement or senior housing facility's location can help or hinder an investment. If the facility is in an area with a high demand for senior housing, you're likely to see a positive return on investment more quickly. Other factors about the location, such as its economic condition, how far away hospitals are and the size of its population, can also influence how risky the investment is.
- Regulatory changes can affect costs: Senior living homes, particularly assisted living facilities and skilled nursing facilities, are subject to state-level regulations. Changes in state laws, such as a new law requiring an increase in the number of nurses working each shift, could increase the facility's operating costs.
- There is a reliance on property management: One notable difference between senior housing and other real estate investments is the business model. Senior housing facilities are often a hybrid model. You're investing in the property and the business itself, much like a hotel or other customer-service-focused business. The facility's success relies heavily on its management.
- The market is fragmented: The senior housing and care market is a highly fragmented cottage industry. Being a successful operator takes an intimate knowledge of the local market, a robust marketing strategy and the right doctor relationships. Regulations change state by state, so there are inconsistencies between facilities. These are a few reasons we see expert local and regional operators thrive.
Why Invest in Senior Housing?
Though it has risks, there are also many benefits to investing in senior housing.
People Are Living Longer
In the U.S., the average life expectancy is 78.8 years, due to improvements in health care and medicine. Antibiotics, vaccines and medications that manage long-term conditions help people live longer and healthier lives. Improvements in drinking water safety and quality and reducing malnutrition with healthy eating have also contributed to people's extended life expectancy.
As a result, the number of seniors is rising, and the demand for designated housing arrangements with amenities that serve this population is growing. By 2034, the number of people over age 65 will outnumber the number of children under age 18 for the first time.
Senior Housing Investments Are a Needs-Based Demand
Another consideration of those who venture into the property industry is an investment in a stable source of income. This sector has a needs-based demand, which has allowed senior housing like assisted living to withstand many of the recession pressures that other commercial real estate faces. With senior housing, the need for long-term medical and health care will be present regardless of the economy's performance.
A senior housing investment's needs-based demand positions this deal to be a strong industry sector, as it remains somewhat resistant to the usual recession pressures affecting other segments.
How to Invest in Senior Living Facilities
Investing in a retirement home or assisted living facility doesn't mean you need to purchase the entire property independently. Several options are available for senior living investment.
Invest in a Real Estate Investment Trust
A REIT is a company that lets investors pool money to purchase property. REITs can take many forms. Some buy properties to rent to tenants, while others actively develop land and manage properties. As an investor in a REIT, you wouldn't be solely responsible for managing the property.
A REIT can be a good option for an investor who's looking to passively get involved with real estate or for an investor who doesn't have a high net worth. Another way to understand REITs is to think of them like mutual funds for real estate.
Convert an Existing Property
Another option for investing in a senior living facility is to convert a property you already have in your portfolio to an assisted living facility or senior co-housing. You can hire a separate company to manage the facility's day-to-day operations, making the investment relatively hands-off. Alternatively, you can rent the property to a company that owns and manages retirement homes, allowing the other party to take on liability and responsibility for the senior housing.
Purchase an Existing Facility
Depending on how much you have to invest and how involved you'd like to be with the investment, you can invest in senior housing by purchasing a community or facility that already exists. Purchasing an existing senior living community might be the most direct way to invest in senior housing. You'll have control over the facility's operation and will also assume responsibility for any liabilities.
See Senior Living Investment Properties Available on 1031 Crowdfunding
Since senior housing operations tie directly to the underlying real estate, it’s vital to have an acquisition team with extensive experience in the senior housing real estate space. Understanding the operating business is crucial to making a smart investment. When purchasing the facility, the acquisition team is underwriting the business. While acquisition professionals in standard asset classes are abundant, there are a limited number of well-qualified senior housing acquisition professionals. Creating and maintaining relationships with local and regional operators is a pivotal strategy for senior housing acquisitions. Many transactions have a sale-leaseback structure. In this scenario, the operator who owns the facility could sell the building and free up cash to expand their operations.
You can use an investment in senior housing as part of a 1031 exchange, meaning you can defer taxes. To meet 1031 exchange requirements, the sale needs to close within 180 days.
1031 Crowdfunding offers senior housing Delaware Statutory Trusts to diversify your income stream without assuming management responsibilities for the property. Register with us to join the crowd and see the properties we have available today.