Should You Invest In Senior Housing (And Is Now the Right Time)?

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Before COVID-19 hit the market, senior housing was becoming a hot topic among real estate investors. It became an attractive idea for many due to the higher returns offered in the sector as well as less competition than in traditional multifamily. 

However, those higher returns were available due to the higher risk profile associated with these assets, and many investors new to the space learned that the hard way. Investing in senior housing can be a great way to generate wealth in real estate, but there are some very important nuances to understand.

Are you the right investor?

It is especially important to do a little bit of soul-searching before you jump into senior housing. 

In any real estate investment, the best way to make good long-term returns is to provide excellent properties at a good value to your tenants, whether they are retailers, storage users, apartment dwellers, or office tenants. Cutting corners or looking to make a quick buck may work for a short time, but never precedes long-term success. 

In senior, you can crank that up to an 11. If you’re not thinking about senior for the right reasons, you can stop right now and go back to what you’re familiar with. 

As an owner in this space, you have a special duty to provide a good, safe, and happy environment for your residents, who (by definition) will be more vulnerable and in need of honest and competent help. You have to be willing to do the right thing for your residents, even if that means losing some money in the short run. 

If you run your property with care and compassion at the heart of what you do, the profits will follow.

What is “senior housing”?

Senior housing encompasses many different investment types, with very different characteristics based on the type of renter you are servicing and how much care and assistance they need. This is called the acuity scale. As you go higher up on the acuity scale, you’ll need more employees, more services, and more money. This also comes with higher cap rates and better potential returns if you can execute well. 

At the low end of the acuity scale are age-restricted properties. These properties tend to function much like traditional multifamily but are limited to people over a certain age—usually 55 and up. Here you are serving residents who want to escape from the everyday duties of homeownership and be around people their age. 

The next step up is called independent living (IL). In an IL facility, residents are generally fairly healthy but require some additional services. Here you’ll often be providing three meals a day; shuttle services to shopping, church, and other activities; and a full social/activity calendar to keep your residents active, engaged, and socializing. At a good IL facility, residents should spend the vast majority of their day outside of their rooms. A certain level of medical care may be provided in IL facilities, but residents are largely able to take care of themselves.

After IL comes assisted living (AL). These residents need a certain level of regular medical care. In these facilities, caretakers will dispense medicine, assist with hygiene, and generally be more involved. 

Memory care (MC) is the next step on the acuity scale. MC facilities have very high staff-to-patient ratios and provide nearly round-the-clock care to patients with Alzheimer’s disease and other neurological disorders. These facilities are always on careful lockdown to prevent patients from leaving unattended. 

Skilled nursing facilities (SNF, sometimes called “sniffs” in the industry) are the highest level of acuity outside of a true hospital or hospice setting. Patients often spend time here after an injury or major surgery, with the goal of rehabilitation and return to an IL or AL community. Here you’ll be staffed with registered nurses, doctors will make rounds, and you’ll likely be dealing with Medicare/Medicaid reimbursements.

While there are stand-alone facilities, you’ll often see buildings with a combination of of IL/AL/MC under one roof to allow for an easy transition to more acute care as residents age.

Senior housing is absolutely a different animal than anything else in real estate. It is much more like operating a business than a passive investment. If you’re planning on getting started in the space, you should first partner with an experienced management company and operator and start with an IL facility that is private pay only—no Medicare or Medicaid, which can often involve additional costs and complications.

Okay, Boomer

The United States population is getting older. This is going to have many repercussions across several areas of investing. You may want to invest in producing a Matlock reboot, or maybe invest in Werther’s original candies. If those two fields seem crowded, perhaps senior housing is another opportunity.

Shown below is the age distribution in the country currently. Notice the bulging age bracket full of our favorite folks—the Boomers. This group is in their early 60s to mid-70s, is starting to retire, and will continue to retire in large numbers over the next several years. Peak Boomers were born in 1957.

The projected 2040 age distribution from the U.S. Census looks similar, but with the older age groups filling out much more as medical advances help keep people around longer. 

The Census Bureau also projected the percentage of the population over 70 years old through 2050. Notice how an inflection point occurred around 2015, and how the slope of that line continues through 2040 (projected) before tapering off a bit. From about 9% of the population 10 short years ago, it’s now at 11.25%, and will jump to around 16.75% of the population by 2040. That about one in every six people.

The number of people 70 and over grew by 19% from 2015 to 2020. While the growth rate is projected to decelerate from that peak, projections still show the growth rate of the older population well above that of the under 70 group for the next 20 years.

The trend is clear. There will be a strong and sustained demand for senior housing for the foreseeable future.

Over the short run, there are serious risks to investing in senior housing during this pandemic. The good senior housing operators have been tirelessly working to protect their residents with PPE, testing protocols, increased wellness checks, and many innovative ideas. This comes with increased costs and lower profits.

For the time being, it may be wise to let the seasoned veterans handle the crisis and look for opportunities when the smoke clears. However, senior housing can be a fantastic long-term bet for smart investors—as long as you keep the caveats above in mind. If you do go into a senior deal, make sure you’re with an absolute best in class operator who you feel very comfortable with and who you know is going far above and beyond in the name of safety for the residents.

Are you investing in senior housing or have plans to do so?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.