Owning an assisted living facility is a profitable business. When they are full and well managed, assisted living facilities are absolute cash cows.
Margins run into the 40 percent range. Resident stays are about 18 – 24 months so it will take some effort to keep your facility constantly full.
Assisted Living Facilities can vary in size – anywhere between 6 beds and 200 beds capacity. Being a low margin industry, it is critical to have the rooms filled and keep the vacancy rate low.
Investing in an assisted living home can be very profitable if you can meet the requirements. It should be noted that residents pay a fairly high amount per month to retain their rooms, but the cost to set up such facilities is also high.
Why Do People Think Assisted Living Facilities are Not Profitable?
One of the reasons for this is that Medicaid pays little if anything and less than 5% of seniors have long term care to pay for the service on their own.
Seniors are almost completely dependent on the sale of their home to cover the costs. Margins in the business typically range from -10% to 3%.
To get started when opening an assisted living community, you will be required to finance 35% of building cost and have a cash burn of up to 2 years.
Operating cost can range from $3000 – $5000 per unit depending on occupancy, so you need to make such returns if you want to make a profit in the business, then you have to pay for liability insurance and your mortgage.
You need a licensed administrator attached to your property (about $120,000/ year before you start accepting residents). You also need Med room staff, housekeeping, attendants, a chef for three meals a day, and maintenance and security.
With increasing state requirements and regulations, cost of operating assisted living facilities is typically going up. Most residents pay from their private funding sources as Medicaid and Long Term Care Insurance coverage is very minimal.
Large and higher end facilities can fill the facility easily with their reach, resources and target audience. You have to leverage the technology and internet for getting referrals and managing the facility operations.
If you are able to clear all those hurdles, you can refinance as a multi-family housing complex which may generate you income, if and only if you have a great relationship with a good bank.
This is the basic reason why the industry is now dominated by multibillion dollar real estate investment trusts that will instantly price you out of the market if you can get all of the other elements in place.
3 Ways to Make an Assisted Living Home Profitable
There are different types of assisted living, and the rules vary between states in the United States of America. Most facilities require licensing for the property and even the operator.
There are requirements a person has to meet to become licensed to operate an assisted living home. Running an assisted living facility isn’t as easy as a real estate investment.
There are a few ways to start investing in assisted living homes if you want it to be a profitable business for you. The way you choose depends on your goals.
1. Being a full-time operator
One option for investing in a senior living facility to make it profitable is to become a full time operator and manage the business yourself.
Being an operator has many requirements, but it can be the most profitable. The requirements for owning an assisted living facility depend on the state you plan to invest in.
The National Center for Assisted Living gives the requirements for each state in their assisted living state regulatory review.
2. Being a landlord
Another option to profitable invest in an assisted living facility business is to find and operator and lease them the property.
This makes your assisted living investment similar to a rental property. In this case, you get to have the business in your facility but not run it.
There are two common ways to lease a facility to an operator. Many leases are set up like any other commercial real estate lease. The assisted living operator makes a fixed monthly rent payment to the investor.
Another method has each resident pay rent right to the property owner. They also pay the operator for their care. The income depends on how full the facility is with this method.
Rent payments provide a good income when the place is full. The income suffers when there aren’t many residents. This method has a lot of upside potential, but less consistency. Your income depends on how well the operator runs the business.
3. Hire an assisted living management company
Let’s face facts here. You may love this business but would not necessarily want to run it by yourself. Hiring a management company would allow you to own the property while somebody else hands the requirements and runs the business.
You need to find an assisted living management company to run the business in this case. They would be responsible for handling staffing, schedules, finding residents, and all other business operations.
All expenses, including staff salaries, come off the top. The management company and investor split the profits after that.
You may expect the management company to take 20%, or more, of the profits. But a good assisted living manager will increase profits enough to make the split worthwhile.
Capital Needed to Start an Assisted Living Facility
The amount of capital you need to start an assisted living facility depends on many factors. These factors typically include; the cost of real estate in your area, how many changes, if any, are needed to your property? Will you be working in the facility, or hiring staff or managers to do all the work?
The exact amount is something you need to calculate for your own circumstances. But here is a list of things to keep in mind when you do the math.
- Down Payment:
You may be buying, building or converting your new assisted living facility. In either case, you will probably be financing most of the price.
Lenders will normally require a down payment equal to 20% to 25% of the cost. Yes, there are many ways to reduce that percentage but this is what most will need.
: So now that you have your building, it’s going to need furniture, equipment, supplies. Some estimate this amount to be $3,000 to $5,000 per unit after accounting for both resident unit and common space furnishings. Your facility may be more or less based on its size and on both the quantity and quality of the furnishings you provide.
- Working Capital
This is an area where many undershoot their estimate. Working capital is basically the cash you have in your checkbook to fund operations after you’ve bought, furnished and supplied your facility.
If you are buying an existing facility that is producing positive cash flow, it will be much easier to estimate the amount you need: often that’s 30 to 60 days of operating expenses, including all payroll, mortgage payments and all other costs. If you’re starting from scratch with no residents in a facility that you build or convert, then it gets more complicated.
How long will it take to lease up? when will you reach break-even? Will the rates you expect to receive turn out to be those you do?
For now plan to fund operations for at least three to six months before reaching break-even and maybe longer for larger facilities.
Conclusion
Unless you have worked in the industry and are passionate about working with seniors, assisted living industry is not for you. In fact, not everybody is suited for this business.
If you are really sure this industry is for you, you may have to explore the option of working with experts and management companies to learn the ropes and to equally learn how to increase your business profitability.