November 6, 2012
Reasons to Invest in Senior Living
The Calm Before the Storm
Many experts believe that the current low-point of construction is merely the calm before the storm. Real estate investment trusts are fighting one another to acquire already-built properties, but small to mid-level firms are in a building mode. Many current facilities also have waiting lists, with national occupancy at approximately 88.8%.
Rise in Demand
The demand for newly built properties is expected to rise as well, because over 15,000 current senior living facilities were built before 1975 and are essentially obsolete. In addition, the number of seniors needing senior living facilities will only continue to rise, with estimates stating that by 2050, there will be over 90 million seniors over the age of 65.
Few Ties to Other Economic Conditions
Senior housing has a business cycle that is separate and certainly different from other property types. Many seniors today are more likely to be better financially equipped to pay expenses and comfortably live out their golden years than anytime before. The popularity of retirement plants, personal stock portfolios and 401K programs have allowed current retirees to save at a fantastic rate. Demand can be affected by severe inflation and when seniors have difficulty selling their homes. However, the true need for senior living services and the receipt of Social Security benefits help to offset some of the other negative economic effects.
Senior living facilities have a combination of real estate, service programming and facility design, which provides cash-on-cash returns ranging from 7% to 11%. In addition, senior living facilities may experience internal rates of return ranging from 10% to 20%.
Small Additions Lead to Large Returns
Small additions to existing properties can provide significant returns and an increase in net operating income. Also, the additions can produce leveraged internal rates of return in excess of 30% without exposing the property or the investors to only a little risk. Many independent living facilities are choosing to add smaller assisted living wings to help increase income. The focus on assisted living facilities is based on the much higher revenue per unit with an assisted living facility, compared to the independent living portion of the facility. Generally, an addition will lead to small increases in the wage, utility and food bills, but the proposed return significantly outweighs those costs.