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Investing in Residential Assisted Living (RAL) Facilities

From time to time, the question of investing in residential assisted living (RAL) facilities comes up in our online physician communities. This is a unique and niche asset class that combines real estate investing with running a business, and can be quite rewarding from a mission standpoint as well as lucrative, but also very time intensive. Below, we’ll cover what residential assisted living is, the pros and cons of investing in this space, and how to get started.


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The pros and cons of investing in residential assisted living (RAL)


What is residential assisted living (RAL)?


Residential assisted living facilities represent a unique asset class within real estate investing in which investment properties (usually single family homes or group homes) are converted into facilities that care for senior citizens. 



How are residential assisted living facilities different from nursing homes?


Unlike nursing homes, which are more institutional in nature and provide clinical services to a large number of residents, RALs typically focus on providing assistance with activities of daily living (ADLs) to a small number of seniors in a more residential setting. The residents of RALs are generally much more independent and mobile. As such, the staffing needs aren’t as complex (read: require less higher level nursing staff), and while there are licensing and regulatory requirements, they’re significantly less stringent than nursing homes. Most people pay for residential assisted living facilities out of pocket or through long term care insurance, rather than health insurance or Medicare based payments. 



What are the defining features of RALs as a real estate investment asset class?


Residential assisted living facilities reflect a hybrid asset class, in that you are both investing in the real estate itself, as well as running a business providing assisted living services to seniors. Because of this, the financial upside of this asset class can be greater than investing in either commercial real estate or in a business alone. However, the workload is also greater.



How do people invest in residential assisted living facilities? 


While there are funds out there to invest in this asset class more passively, this article will focus on actively investing in residential assisted living (RALs). That said, the principles discussed here as well as pros and cons also apply to passive investing in this space.


Typically, someone looking to invest in RALs will acquire a single family home in a residential community, and then rehab or retrofit the property with the necessary features to ensure the safety of the residents and accessibility for seniors. This property will usually be a mid to larger size property to accommodate the needs of several residents. Regulations in this space vary by location and state, but the facilities are usually licensed to house 6-16 residents at any given time. 


The facility will need to comply with both local housing regulations as well as healthcare regulations for facilities of this category, including the number and training of the staff. Each state, and even municipality, may have its own regulations, so it’s very important to check with these and have appropriate legal and regulatory guidance. 



How much money can you make from a residential assisted living facility (RAL)? 


This will depend a lot on how you run the business as well as the market and target demographics in your area. However, each resident is typically charged between $3,000-8,000 monthly, so a house with 10 residents could provide a lot of cashflow annually. Keep in mind that expenses are high secondary to staffing, the size and upkeep of these homes, food, and other regulatory compliance, but even so, most physicians investing in this space report significantly higher cashflow than other commercial real estate asset classes such as long term rentals. 



What are the pros and cons of investing in residential assisted living (RAL) facilities?


Benefits of investing in residential assisted living


  • Fills an important need: This is a feel-good asset. By providing a space for seniors to age gracefully and maintain their independence for as long as possible, many physicians love the idea of helping a population that they often see as patients (and whose struggles they witness as they transition to senior stages of life). 


  • Recession resistant asset secondary to growing demand: As the Baby Boomer generation retires, the need for assisted living facilities is constantly increasing. Recession or not, these seniors will require housing and assistance. 


  • Higher cash flow than many other real estate asset classes: As alluded to above, the rent from multiple residents who each pay thousands a month allows for much greater cashflow, which translates to higher profits on average. Some estimate most RALs generate 2-3x the profit of a single family rental, even when accounting for the increased expenses.


  • Niche field with less competition for properties and business: Because of how much experience and compliance is required to run these, many people (especially busy physicians) stay away from this asset class. But this leaves the door wide open for those willing to learn the trade, comply with the regulations, and run the facilities to have plenty of opportunities and better access to deals. 




Downsides of investing in residential assisted living


  • Complicated asset with lots of regulation, and ongoing compliance: Unlike a rental property where you turn over the keys to the tenant and can be mostly hands off, this asset will require your time, overseeing staff, and complying with state licensing, safety, staffing, and other regulatory requirements. You are responsible for staying in compliance (and providing good service to your residents) 24/7/52 weeks a year.


  • Liability and responsibility: As mentioned above, the seniors and their families are trusting you with their lives or those of their loved ones. Lawsuits could happen, so having solid liability insurance is needed.


  • High upfront capital needed to start: Because you have to be able to put up money not only for the down payment on the property, but the outfitting of the space to get it within regulations and move in ready for the seniors, and because you have to pay for legal, accounting, insurance, licensing, and staffing fees, you should have a decent amount of money set aside before embarking in this space. 


  • Staffing challenges in an environment where caregivers are in demand: Finding good, and qualified, help is challenging in every industry, but in this one, having reliable, competent, and licensed staff is particularly hard given widespread healthcare worker shortages. Additionally burnout and turnover are high in this space, and shutting down operations for a day due to short staffing is not an option.


  • Finding appropriate tenants can be challenging: There’s a lot of competition in the senior and active living space, and people can (understandably) be very price sensitive. Good market due diligence on prices, competition, and features attractive to the residents and their families are going to be essential to know you can support operations and ensure occupancy.


  • Hard asset to divest of: As we mentioned earlier, there aren’t as many investors in this space, so selling the asset if / when you decide to can be challenging. If you aren’t able to sell your facility to an interested party, your resale options are going to be limited by the unique nature of the space. Additionally wear and tear may be high secondary to the high number of people that have lived and worked there and wear and the team’s 24/7 presence on the property. You may find yourself having to take out many of the accessibility features you invested in in order to sell the property as a regular single family home.  



How do I get started with learning more about investing in residential assisted living?


Tips for investing in residential assisted living (RAL)

Learn as much as you can


The first thing you’re going to learn as much as possible. There are many dedicated programs, podcasts, blogs, etc., as well as some courses. Proper legal and accounting expertise is needed. At the very least, partnering with someone that has experience in this space and the time to work on the property is beneficial.  


Related PSG Perk: MD Senior Living Academy (use our PSG affiliate link and code PSG150 for $150 off) was founded to teach and motivate physicians to open their own Residential Assisted Living (RAL) care homes. Dr. Sendhil Krishnan co-founded MD Senior Living, and the Academy was created to teach physicians how to obtain financial freedom with their own RAL communities, while also sharing best practices, policies, and strategies freely across all homes.



Choose the right location based on demographics and nearby amenities


You’ll want to choose your location and type of property very carefully based on the target resident population to ensure you’re set up for success. Understanding how much they can afford for rent, and what you need to charge to hit your desired revenue goals, will be essential to successfully building out this investment opportunity. Picking a location near healthcare services and offering amenities that they want will be critical in helping market your facility. 



Secure funding


As discussed above, between the upfront costs of running your business and the down payment for the facility, you’re going to need a significant capital. If you need to get that externally from a a lender, secure the funding as soon as possible, as this can put a real hiccup (or even a halt) to your dreams. There are also opportunities to get investors involved. This can help mitigate some risk or front you with capital you may not have.



Understand the regulatory requirements in your area and get the appropriate licenses


Make sure you hire an attorney and/or business consultant that can help you understand the nuances of what you need in place to legally operate your business as it specifically pertains to your municipality and state. Licensing can take a while, so do this ASAP. 



Hire staff that will be able to fill the shifts and responsibilities that you need


Put effort into hiring the right people, not just enough people to check your boxes. The better the staff can do in their positions, the more passive it will be for you, and the more likely that they will represent your services and business well. Word of mouth will be key to developing demand and even a potential waitlist for vacancies in your facility. 



Consider partnerships


If all of this is a lot at once, or if you are lacking expertise in a particular area, think about pairing up with experienced operators and vendors who can help you run the business on a daily basis, as well as help you navigate staffing, regulatory and compliance, marketing and finding tenants, etc. You don’t have to do this by yourself (and you may not be the best person to do so!). Remember, the smoothness of the business and the happiness of the residents are going to be what makes you successful in this space.



Conclusion


Investing in residential assisted living facilities, though niche, can reflect a very desirable asset class within real estate investing that can provide meaningful diversification of your income streams. If you have the time to manage a team and learn about the business, these properties can cashflow very significantly, potentially even surpassing your physician income, all the while addressing a very real need in this country!



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