As the baby boomer generation enters retirement, the demand for senior housing has grown significantly. An increasing number of seniors, including those with limited mobility or who require special care, are choosing to live in housing properties intended to cater to their unique lifestyle.
This has led to a rise in the construction of senior housing units, which range from independent living communities to assisted living facilities. As a result, the senior housing market can be a good investment that provides a consistent stream of passive income and cash flow for investors.
After all, this type of real estate investment has a large tenant base and a high occupancy rate, according to the National Investment Center (NIC). Before applying for a senior housing loan, investors should consider the type of property they plan to purchase, the location, and any other related expenses, such as renovation costs.
What Is Senior Housing?
Senior housing is a broad term that covers any type of housing designed for older adults who are at least 55 years old. This includes retirement communities, nursing homes, assisted living facilities, and other types of age-restricted housing.
Senior living facilities generally provide residents with a wide array of amenities and services tailored to meet their individual needs and preferences. For example, many senior housing communities offer transportation services, housekeeping, and ease of access to medical care providers.
What Are the Different Types of Senior Housing?
To better inform their senior living investment decisions, investors should become familiar with the different housing types for older adults. Senior housing encompasses a wide range of living arrangements. Among the most common senior housing options are independent living residences, assisted living facilities, nursing homes, and memory care facilities.
Independent Living Communities
Ideal for active adults who want to downsize and simplify their lives, independent living allows seniors to take advantage of the convenience and social opportunities that come with residing in a community setting. With their own private residence, residents can live independently, with access to amenities and assistance as needed.
This type of senior housing may come with a variety of amenities, such as fitness centers, swimming pools, scheduled social activities, and access to on-site common areas, such as a dining hall. Independent living communities typically consist of condos, apartment complexes, or multi-family homes, and residents may have the option to purchase or rent their units.
Assisted Living Residences
Assisted living facilities offer older adults assistance with day-to-day activities, such as bathing, dressing, and medication management. The staff at an assisted care facility is trained to provide the necessary level of care for each resident. They often work closely with a resident’s family and the physician to develop a personalized healthcare plan.
Nursing Homes and Skilled Nursing Facilities
Nursing homes tend to have an older population, with an average age of 85. Skilled nursing facilities (SNFs) and nursing homes offer long-term care for older adults to improve their life expectancy. The goal of skilled nursing care is to promote the highest level of functioning and quality of life for each resident.
Primarily staffed by licensed nurses, these facilities provide comprehensive medical care and rehabilitative services, including physical, occupational, and speech therapy. Compared to other types of senior living options, an SNF may have a higher staff-to-resident ratio.
Memory Care Centers
Memory care is specialized senior housing for residents with Alzheimer’s disease or other forms of dementia, with around-the-clock care and supervision by on-site medical staff and support services. These centers tend to offer a higher level of security than traditional assisted living facilities, offering features like locked doors and surveillance cameras to keep residents safe.
How Can You Start Investing in Senior Housing?
The senior housing sector offers a few potentially profitable investment opportunities. By owning a rental property designed for senior housing, investors can generate a steady cash flow with rental income. Another way for investors to enter the senior housing sector is through real estate investment trusts (REITs).
Both types of senior living investments carry risks. For example, changes in federal and local government policies and unpredictable economic factors, such as the COVID pandemic, could adversely affect the demand for senior housing. This could lead to lower occupancy rates and rents.
Before deciding on the right rental property to invest in, it is important for an investor to do their due diligence by carefully researching the senior housing market. Take these considerations into account when investing in commercial real estate:
- Demographics: The senior population is growing rapidly, resulting in an increased demand for housing. By 2040, there will be an estimated 80.8 million seniors in the United States.
- Location: When choosing a senior housing property, location is a key factor to consider. Look for properties located in areas with a high concentration of seniors or near hospitals and other medical facilities. These locations tend to be in high demand by seniors and their families.
- Type of property: Choose a property type that meets the needs of your target market. For example, if you’re targeting lower-income seniors, then an affordable assisted living facility could be a good investment.
Real Estate Investment Trusts (REITs)
Instead of buying property, investors can own equity in senior living communities through REITs. These trusts allow investors to pool their money to finance real estate that produces an income. Keep in mind there are two types of REITs: public and private.
Public REITs are registered with the Securities and Exchange Commission (SEC) and trade on major exchanges like the New York Stock Exchange. On the other hand, private REITs are not required to register with the SEC. Additionally, they often trade on smaller exchanges or directly between institutional investors.
Senior living REITs invest in properties that provide housing and care for seniors, including assisted living facilities and skilled nursing homes. REITs offer real estate investors many benefits, including portfolio diversification and the potential for high returns through dividends and capital appreciation.
How To Get a Senior Housing Loan
In order to finance the purchase of new or existing senior housing properties, investors may need to secure a loan. Based on the lender’s terms, the senior housing loan could also go toward constructing, renovating, or refinancing a housing property for older adults.
Some different types of senior housing loans include the following:
- Traditional bank loans
- SBA 504 and SBA 7(a)
- HUD 232, HUD/FHA 223(a)7 Refinancing, and HUD 202
- USDA B & I
- Fannie Mae and Freddie Mac
- Cash-Out Refinancing
- Multifamily Loans
- Bridge Loans
- Private Equity
- C-PACE Financing
Traditional bank loans are one of the most popular methods of financing senior housing.
The process for getting a loan is relatively straightforward. First, check the loan eligibility requirements. For example, a GSE like Fannie Mae offers loans only for existing senior living properties built for a specific purpose, such as an assisted living facility or independent living community.
Next, gather all of the necessary documentation, which typically includes financial statements, tax returns, and a business plan. Then you may meet with a loan officer to discuss your options and determine how much you can borrow.
If you’re approved for a loan, the next step is to negotiate the terms of the loan, such as the interest rate, repayment schedule, and any fees or closing costs, before signing the loan contract.
The process is a little different for acquiring construction loans, another type of loan that may be suitable for senior housing. Before checking requirements for specific lenders, you’ll want to find an experienced builder for your home.
Once you’ve chosen a builder, shop around for a suitable lender, ensure you meet the loan requirements, and gather the necessary paperwork. From this point, the process is essentially the same — wait for approval, and then negotiate the specific terms of the loan.
Is Investing in Senior Housing a Good Idea?
When it comes to senior housing, investors need to weigh both the potential drawbacks and benefits of investing in this market. On the downside, senior housing properties can be more expensive to operate and maintain than other types of real estate asset classes.
This is because certain seniors may need special accommodations to comfortably reside on a property, such as on-site nursing care. These added costs can impact profits and make senior housing facilities a less attractive investment option for some individuals.
On the upside, senior housing rental properties or REITs can provide commercial real estate investors with a stable source of passive income. Plus, older adults typically have a higher income than other age groups, which can provide a steady stream of rental income for investors.
Aside from generating high financial returns, senior housing investments also have the potential to make a positive impact on the lives of seniors. For instance, by investing in quality senior housing, investors can help ensure that older adults have access to safe and comfortable homes as they age.