Does Medical Real Estate Work in a Low-Income Area?

A deal recently came across my desk from McAllen, TX, a town on the US-Mexico border across from Reynosa in Mexico. I’ve never been to McAllen, so I did my usual preliminary Wikipedia review to get a sense of the basics. In many ways, McAllen is an appealing place to invest. Properties are generally cheap, there is a large and growing population, cross-border trade provides stable employment, and it is considered one of the safest cities in Texas.

On the other hand, it there are some aspects of McAllen that might turn away investors. Over 25% of the population was below the poverty line as of 2016, and more than 29% had no health coverage. In the early 2010’s it held the top spot for poorest metro in the nation. Not in Texas, the poorest in the entire United States. Since then, other metros have overtaken it, but it remains near the top (or bottom, depending how you look at it) of the list.

For perspective, if you walked into an elementary school that accurately represented the population of McAllen, all the fifth graders and more would be living in poverty. The entire first grade plus half the second grade would never go to the doctor.

The deal didn’t make sense regardless of the location, but it was an interesting exercise to consider investing in McAllen. The population is just not going to be able to support the same tenants as a wealthier metro, like Phoenix. Is there still a good way for me to invest in medical real estate? If I cover my three basic questions, then the answer is yes.

-Is there a demand for the tenant (the medical service) in the community?

-Is the rent I charge market rate so there isn’t incentive to leave?

-Can the tenant recruit employees (providers) to provide the service?

When the deal didn’t work at face value, I was left without a specific tenant to consider. That opened the question, what type of medical practice do I want as my tenant? It’s actually easier to start with who I don’t want as my tenant. I don’t want medical practices that focus on high-touch, high-end services, such as plastic surgery, fancy sports medicine facilities, private-pay dermatology, etc. They have higher overhead supported by high fees for service, so won’t do well in a low-reimbursement environment. That leaves me with tenants that provide efficient care that are profitable even with majority Medicare/Medicaid reimbursement.

McAllen holds another unenviable title. It is the most obese metro in the United States, with obesity rates in the high 30’s and diabetes in the low 20’s. People with diabetes can suffer long term kidney damage and end up relying on dialysis every day. Given the enormous diabetic population, dialysis centers would have plenty of patients. However, upon looking, I found out there are already 15-20 dialysis centers in McAllen. In my hometown of Eugene, Oregon, a relatively affluent and fit college-town with the same population as McAllen, there are 2.

So clearly other people have had that same idea. Even if there is not room for more dialysis providers, there are other medical services that have high demand and lower supply. Cancer treatment, vascular surgery, pediatrics, and adult primary care all can have efficient business models while still providing great service to low-income communities. They all have essentially immobile patient bases, meaning if the practice moves, their patients may switch providers. If I can partner with one of those providers—provide the real estate for their practice—it will be a stable investment in an otherwise challenging place to invest.

Is the rent market rate so I avoid tenants moving to cheaper office space? It shouldn’t be too much of a challenge to check this box. The cost of living in McAllen is in the ballpark of 10% below the national average. Property values are low. As long as I don’t let tenant improvement costs get out of hand (easier said than done), rent can be relatively cheap. Since medical reimbursement does not vary significantly by location, a medical practice in McAllen will be more stable in theory than a practice in a low-income part of a more expensive city. This was actually a big part of what killed the original deal—the seller wanted $250 per square foot for vacant space. In McAllen where rents are low, there is no way I can get a tenant for a fair rent and make money off the building if I start at that price per foot.

Can the practice hire providers? This question gave me pause at first since McAllen has a large percentage of Medicare/Medicaid patients. Medicare and Medicaid pay less than commercial insurance, practices may be less profitable and providers make less money. Lower pay doesn’t attract physicians.

However, McAllen and its associated metro area is large and growing. There are jobs, and there is solid age demographic diversity. I expect that if I take a more granular look, some areas will pop out as more desirable and more quickly growing. It might not be a Park City or a Jackson Hole where Orthopedic surgeons go to retire, but there will be doctors.

Partnering with physician groups in a place like McAllen has another benefit from my perspective: I am adding value to the community. When I invest, I want the community where I invest to benefit as well. By investing in medical real estate and working to enable physicians to provide their best care to as many patients as possible, I believe I am adding value to the community. This community already struggles with access to healthcare, partially due to lack of insurance coverage and partly due to a lack of access. I can help bring medical services to the community, either by partnering with local physicians or national providers.

To reach out about medical real estate investments or to learn about my upcoming book on medical real estate investing, reach out to [email protected]