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Ask Brian: How Do We Invest in Real Estate for Old Age?

By Brian Kline | October 27, 2020

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].

Question from Meika: Brian, I recently purchased a single family home with an FHA Loan. My husband and I are closer to retirement than not and I am currently caring for my 90 year old mom. We’d like to have a little security in our later years, and would like to purchase an investment property. I’ve noticed homes in my price range flying off the market like they’re on fire. I feel we need to jump now, so that we may still be able to have a profit market for renting and/or assistive living situation. We’re new at this. Any advice?

Answer: Hello Meika. I like the way you are thinking about your future both for investing and assisted living. The only information you provided about your local market is that it is a hot market. Real estate has a long history of going through somewhat predictable cycles. Historically, a hot market would indicate the market might be peaking. If you follow the basic investment model of buying low and selling high, you wouldn’t get in when the market has been hot for many months or years. Instead, you would buy when the market is cool or even cold (a buyer’s market). Even if you are looking for a long term rental investment, it would be best to buy low. You might want to look at this January 2020 article about the real estate investing cycle: Ask Brian: Real Estate Investing Challenges for 2020.

However, as we all know, everything in business and real estate has changed drastically since January. It has become a very difficult market to predict for rental properties (it’s always a prediction). The rental eviction moratoriums have created a situation that no one has figured out. There is no end in sight for the moratoriums and more importantly, no plan for how the back rents will ever be paid. This is a high-risk time for mom and pop investors getting into rentals. No doubt, a significant market still exists for affordable rental housing but financially responsible investors can’t live with the risk. Even major developers are saying they plan to complete projects that are in progress but will not be starting new projects because of the economic uncertainty.

Meika, let’s take a look at your other interest in assisted living. But rather than becoming a landlord wanting income from a traditional rental house, consider an assisted living facility as the investment. The business model is much more stable because seniors in retirement have dependable income that does not rely as much on the uncertain economy. Astute real estate investors are aware of the outstanding opportunity that assisted living facilities will offer for decades to come as 73 million baby boomers continue retiring at the rate of 10,000 per day. The frustration is that building or purchasing a fully developed facility can easily cost more than $20 million. One option is investing in shares through a REIT that specializes in assisted living facilities if you are comfortable with a corporation managing your investment. However, also think about how unstable Wall Street investments can be. There are assisted living alternatives that you can consider as an individual investor or with partners….

Large residential homes in upscale neighborhoods are being converted into assisted living facilities. In one business model the homes are purchased, converted, and then leased to licensed care providers. In a related business model, the facilities are converted and the investor sets up his/her own care provider business to manage the facilities.

As these new business models evolve, the tendency is to search out single-level, single-family residences in affluent neighborhoods. Two important keys to these properties are large square footage and the more bathrooms the better. The number of bedrooms isn't as important as bathrooms because it's relatively inexpensive adding more bedrooms by dividing large suites or adding bedrooms in the garage or as additions. Adding more bathrooms is expensive because of the need to install plumbing and fixtures.

The money is in the number of bedrooms the facility has. Each state has regulations for how many bedrooms an assisted living facility can have in a residential home. In California, it’s 6 bedrooms but some states allow up to 10. Sometimes, states also regulate how close together these facilities are allowed to be. Be sure you fully understand the regulations at your location.

Finding the right house in the right neighborhood with the right zoning is more important than a bargain purchase price. This is really about is the cash flow. What tenants pay for assisted living varies but in California, the average resident pays about $4,500 per month (2019 data), which comes to $54,000 per year. However, the price varies by region. In California, the monthly cost generally ranges from r $3,175 to $5,850. Across the country, the range varies significantly more - $1,000 to $10,000 per month depending on the level of services. Now multiply those numbers by 5 or 6 bedrooms per facility.

That sounds like incredible cash flow for a single-family residence but the costs of running an assisted living facility are much higher than renting out a single-family home to one family. The facilities reflect a home environment where each tenant has a private bedroom and all meals are prepared for them. There is also a 24-hour staff member on duty. It's important that tenants receive quality care and be treated with dignity. Still, a well-managed assisted living facility can be expected to deliver between 15% and 25% in annual profits. An investor putting together 5 or 6 of these properties can earn a very good return on his/her investment.

Meika, this probably isn’t the advice that you were expecting but the uncertainty of these time calls for thinking outside the box. Just remember that assisted living facilities are more of a business than passive income.

What advice can you offer a new investor wanting to become a landlord? Please add your comment.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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