What to consider when investing in elder homes

By ,
Ask a Lender
December 15, 2017


Key Points

Opening a residential care home

  • Elder care homes can be located in converted homes in neighborhoods.
  • Typically, the facilities offer room and board, and may offer help with personal services and provide transportation.
  • Facilities are licensed by the state

As the baby-boomer population ages, more Americans are moving into assisted living facilities that are located in converted homes in neighborhoods.  

Residential assisted living facilities, also referred to as adult care homes, aren’t full-blown medical facilities such as you’ll find in nursing homes with round-the-clock care for serious medical and mobility issues. In these adult care homes, residents generally receive basic assistance, such as meals and medication disbursements, as well as help with personal care, transportation or laundry.

Residential assisted living facilities can be lucrative for their owners and investors. Some studies suggest that the average resident of one of these facilities in a state like California will pay more than $3,000 monthly in rent, or more than $45,000 a year for a room.  

Given the nation’s aging population, it is not surprising then that residential assisted facilities have caught the attention of investors.

Hurdles in opening care facilities

The business of starting a residential assisted living facility involves more than a matter of buying a big house and hanging an open-for-business sign on the door. Depending on the size of the facility, this investment could fall into the category of a commercial facility, a multifamily property or a residential home.  

In turning a residential property into a cash business, an owner will have to clear several hurdles. Residential assisted living facilities are licensed by the state, which establishes limits on the number of beds and sets other minimum requirements for the facility.

In Washington state, for example, the number of residents determines how the facility is classified and licensed. In that state, homes with six residents are known as adult family homes; and those with seven residents or more are known as assisted living facilities. The level of care will also affect the rules and regulations required of an owner.

Another issue is the local zoning. If this is a new facility, the investor will almost certainly need to get approval from a local planning board. Local boards may layer additional requirements on the property and the business above the state regulations. In some cases, assisted living facilities are located within residential communities with homeowners associations, which also closely monitor the landscaping and exterior condition of the property.

Business considerations

On the business side, one of the first hurdles involves picking the right location. You will have to determine if there is a need for senior housing in the area. Finding the right property in the right location can significantly boost the overall cash flow. There are also a number of risks in running assisted living homes. An owner may be only able to find one or two senior tenants, but have the capacity for several more, and the beds go unfilled. As with any business, there are fixed costs associated with running a home for seniors. Before opening a home, any owner needs to have firm idea of its potential revenues and the costs.

Another obvious hurdle is the need to provide a pleasing facility where seniors want to live. As with all multifamily rental property, there are sometimes problem tenants. Running an assisted living facility carries the special challenges of catering to elderly tenants.

The investor must also decide how active they want to be in the investment. Depending on the level of care, residential care facilities often employ caregivers and staff. Typically, licensed owner-operators are required to take courses and training. In some cases, investors choose to take a passive role and hire out managers and other professionals to run the business.

It should also be noted that commercial and multifamily lenders typically will look at the experience of an owner seeking financing before signing off on a loan.

Compare Home Mortgage Lenders