How Investors Are Earning Huge Returns on Assisted Living Facilities

As a commercial real estate broker, I have worked with investors of all types; from individuals with a couple of single family rentals, to developers that are worth hundreds of millions of dollars. Aside from a few developers that have done a great job at predicting the future and buying the right piece of land early, the best returns I've seen any investors make have been on 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 a specialized business involving large corporations or people with medical degrees. However, as I worked 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 money hand over fist. The real interesting thing about that, is the ones who are killing it aren't the owners with medical backgrounds, that you would expect to be operating assisted living facilities, but the real estate investors turned assisted living owners. 

Now, 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 main ways I've found that you can start investing in assisted living facilities;

1. 1. Be an operator. This is the obvious one. 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. 
2. 2. Hire an administrator/ manager. In most states, an assisted living facility needs to have a qualified administrator to oversee the operations and ensure the residents are being cared for properly and safely. 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 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. Just like there are property management companies that will manage your rental properties, there are management companies for assisted living facilities. Just like with other real estate investments, the management company charges a percentage of the gross income.
3. 3. 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. 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. 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. 
4. The major difference between these two scenarios is the amount of risk versus the reward. When leasing directly to the residents, the investor has the risk of the facility having high vacancy during certain months, but typically 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 receiving a set amount each month for the length of the lease, but doesn't get the upside from the months of full occupancy. 

Do I recommend that all investors should start jumping into assisted living facilities? Definitely not. There are a lot of regulations involved with local and state governments, an increase in liability, and the need to learn a lot about a completely different property type. Each state has their own set of 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 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.