Investing in multi-resident real estate has been—historically—one of the most effective ways to increase your personal equity over time. With the right residential real estate investments, you will be able to consistently generate stable, predictable cash flows, while also benefiting from the general increase in property values over time.
In other words, even modest multi-resident properties can consistently outpace the cash flows and equity growth that occur in the stock market and other speculative markets. In fact, over the past 40 years, the real estate market has as a whole delivered stronger returns on investment than the S&P 500 Index about 75% of the time.
Naturally, when comparing different real estate investment options, there are many factors you will need to consider. Even when the collective marketplace is performing relatively well, it will still be extremely important to do your due diligence and carefully select the properties you plan on investing in.
One of the first decisions you will need to make is, what type of property you want to invest in? Even if you are already determined to invest in the multi-unit, residential commercial real estate community, you’ll quickly discover that there are many different options available to choose from. And, as you’ll probably expect, each of these properties will have various pros and cons associated with it.
Recently, one of the most productive vehicles for real estate investing has been senior living facilities. As the population continues to age—which is currently the case in the United States and even more noticeable in Europe and Japan—the demand for senior living facilities has considerably increased. This is especially true in states like Florida, where the population has been increasing alongside its aging.
In response, there are countless investors who are now interested in senior living facilities. This entire sector of the industry has, in fact, been consistently growing since the turn of the century, even during periods of relative economic uncertainty such as the 2008 financial crisis and the 2020 COVID-19 outbreak. However, that doesn’t mean that every senior living facility will necessarily be the perfect investment for you. In this comprehensive guide, we will discuss some of the most important things to consider when investing in senior living facilities, including what they are, their pros and cons, things to keep in mind when selecting a property, and more.
Let’s dive in and take a closer look.
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What Qualifies as a “Senior Living Facility”?
Before learning more about how to successfully invest in a senior living facility, it is important to define what—exactly—a senior living facility actually is. In this case, it will also be important to define what a senior living facility is not.
Anyone who has seen the HBO classic “The Sopranos” likely remembers how adamant the lead character, Tony Soprano, was about defining the difference between a nursing home and a retirement community. Of course, in this context, Tony’s concerns primarily centered on finding a place for his resistant mother. But these sorts of distinctions are likely even more important for long-term investors.
First, let’s start by defining what distinguishes senior living facilities from ordinary multi-unit living communities, such as apartments or condos. In most cases, senior living facilities will have a minimum age requirement. While some facilities might be a bit more relaxed with this cut-off, the usual minimum age requirement is 55 years old for all residents. The average age for people living in non-intensive facilities is usually around 70-75.
But getting back to our previous point, it is important to remember that a senior living community (commonly known as a “retirement home”) is structurally and financially different from an assisted living community, which is commonly referred to as a nursing home. As the names might imply, residents of a traditional retirement community will typically have much more day-to-day independence than residents of an assisted living community, where people typically need a considerable amount of help managing their daily, personal tasks.
In many cases, you can find senior residencies that combine multiple different types of living options into a single location (i.e. there will be apartments and even houses for independent seniors, medium-care residencies for seniors who need minor assistance, and full care (nursing) facilities for those who need more intensive care). It is not uncommon for a single person to transition from one unit to another towards the end of their life.
As a result, the term “senior living facility” is often used somewhat ambiguously. However, in the broader real estate community, this term is usually used to mean “retirement community”, “independent living”, and other designations that are reserved for people who mostly live on their own, without the need for daily assistance. For the remainder of this guide, these are the types of facilities we will refer to.
Changing Demographics, Changing Demand
Both in terms of absolute quantity and average age, it is clear that the senior community within the United States is rapidly expanding. This is largely due to the fact that the so-called “Baby Boomer” demographic—generally used to describe individuals born between 1946 and 1964—is proportionately the largest generation in the US and is rapidly progressing into retirement.
In fact, according to the most recent Census (2020), this demographic currently accounts for about 73 million people, which is about 20% of the entire American population. Furthermore, as the New York Times correctly observed, “The U.S. population is older than it has ever been.” In 1980, the median age for Americans was 30—by 2020, that figured reached 39. While 9 years might not seem like too much at first, when extended over a massive population, it can make a tremendous difference. There are more than 10 million additional people interested in living in senior living facilities compared to just a few years ago—in turn, the demand for these properties has absolutely skyrocketed.
Benefits of Investing in Senior Living Facilities
The most obvious benefit of investing in senior living facilities is that these facilities—like many other potential real estate investments—provide two distinct paths for generating equity. The first path is through the ongoing, predictable generation of rents. In many communities, multi-unit senior-oriented properties can be rented for two or even three times as much as non-senior units with a similar level of square footage (meaning if the typical rent in a neighborhood is $1,000 per unit, senior units can command up to $3,000 per unit).
Of course, this doesn’t necessarily mean that owners of senior living facilities will be making three times as much over time—the expenses associated with these units are typically much higher. Nevertheless, the rental potential still remains. Even when adjusting for increased expenses, the overall ROI remains quite a bit higher.
Furthermore, senior living facilities continually increase in property value over time. In fact, recent reports from the National Investment Center indicate that the increase in total property values has outpaced non-senior properties (as well as most other real estate classes) over the course of the past ten years. An ongoing increase in equity—while not the only factor worth considering—is one of the strongest drivers of future returns.
Lastly, investors in senior living facilities can be confident that the demand for these properties (which are still measurably undersupplied) will continue to increase over the next few years. The United States is a highly developed country and, like nearly every other developed country on Earth, the population will only get older over time. When combined with the fact that the total population is also increasing (contrary to some other developed countries such as Japan), it is clear that demand forces within this industry will remain stable.
Drawbacks of Investing in Senior Living Facilities
Naturally, as you will see within every real estate investment class, investing in senior living facilities is an endeavor that also carries its fair share of drawbacks. Of course, this doesn’t mean you should write off the investment class entirely—these are just risks that will need to be considered.
Perhaps the clearest drawback of investing in senior living facilities is that, relatively speaking, these investments have a mid-term investment horizon and are somewhat illiquid. If you are directly investing in these properties via a real estate syndicate—as opposed to say, indirectly investing in them through a real estate investment trust (REIT)—you will likely need to commit at least three years to your position. Within most syndicates, exiting your position early will be a structural possibility but the fees that come with doing so will often be quite high.
Another category of risk faced by these investors is the ongoing risk of economic uncertainty. As suggested, there are quite a few reasons to believe that these investments are resilient, even in the face of a sudden recession—this is something that has certainly proven to be true following the fallout of the COVID-19 pandemic. But even keeping that in mind, consumer preferences, inflation challenges, and the emergence of categorical alternatives could all be causes of financial distress over time.
Still, even keeping these drawbacks in mind, it is clear that investing in senior living facilities can be a very lucrative endeavor. However, even once you have decided to become an investor, the next thing you will need to consider is which property you should invest in.
How to Find the Ideal Senior Living Facility for Investing
When comparing possible senior living facilities to invest in, you’ll need to start by thinking about the type of living center that effectively meets your needs. This means deciding whether you want to invest in a very large facility—that might have 1,000 residents, or even more—or a smaller facility, which could have as few as 20 active residents. Larger facilities allow for more stability while, in general, smaller facilities carry both higher risks and higher potential returns.
You’ll also need to consider the type of care that is being provided. As indicated, the most “basic” senior living facilities are essentially apartment complexes limited to people 55 years old or older. On the other end of the spectrum, there are hybrid facilities that offer comprehensive, long-term care (these facilities are typically larger). Naturally—both in a positive or negative direction—these structures can impact your future risk-reward forecast.
The exact location of the senior living facility will also influence the feasibility of a prospective investment. Over the past ten years, the population (including the senior population) has become more urban and less rural, meaning that facilities that are located in suburban areas or near urban areas will generally have a more stable rent-paying population.
The population, as a whole, has also consistently shifting both south and west. This is especially true among the senior population, who tend to prefer the sunbelt regions of the country to the much more challenging, snowy Midwest and Northeast. Some of the fastest-growing states in the country—especially among residents over the age of 60—include Texas, Florida, North Carolina, and Florida. As you might expect, these have been some of the best places to become a senior living facility investor.
Is Investing in Senior Living Facilities Right for Me?
Whenever you are considering a commercial real estate investment—regardless of the type of investment that might include—it will be absolutely crucial to your due diligence and carefully research the pros and cons of each available option. Otherwise, you will be needlessly increasing your exposure to risk.
In general, senior living facilities have outperformed both the stock market and the real estate market as a whole. These are lucrative opportunities that will almost certainly be worth pursuing. However, before making a final decision, be sure to consider the overall state of the market, the specific location you are investing in, and your personal risk tolerance and investment horizon. Once these factors have each been considered, the decision that is best for you should become much clearer.
