It’s been said the only thing certain in life is death and taxes.
Of course, properly structured and well-advised real estate investors can usually mitigate most of their taxes.
Meanwhile, before people die, they live. Along the way, they get older. And as people age, their needs change …
… and because entrepreneurship is about serving needs, it’s a safe bet there’s some opportunity in meeting the needs of aging people.
In a recent radio show, we talked about investing in undeniable demographics … specifically, the baby boomers … who are moving into retirement and beyond.
A few days later, this headline popped up in our news feed:
More Growth Ahead in Seniors Housing – NREI August 16, 2017
“… research shows continued confidence in improving fundamentals …”
Of course, if you’ve been following The Real Estate Guys™ for any time, you know senior housing in general … and residential assisted living in particular … is a niche we REALLY like.
The article affirms our belief that …
“ Demographics continue to be a big driver for development.”
“ ‘As active as the market is with the product that we have today, we are looking at the tip of the iceberg in terms of boomers hitting retirement age,’ says Scott Stewart, a managing partner at Capitol Seniors Housing, a private equity-backed real estate acquisition, development and investment management firm based in Washington, D.C.”
“ ‘The fast-paced growth of that population in that sector is going to make today’s discussion of overbuilding obsolete, because there just aren’t enough places for everybody today,’ ” he says.”
The article is addressing … diffusing … concerns about over-building in the niche …
“ Demand mops up new supply.”
“Despite the new supply coming online, respondents remain confident in improving fundamentals. A majority of respondents (78 percent) anticipate that rents will rise over the next 12 months …”
Other notable comments include …
“When asked to rate the strength of market fundamentals by region, the South/Southeast/Southwest rated the highest.”
“When comparing with other property types, respondents continue to rate seniors housing as a highly attractive property type. Its scores topped that of the five major property types on a scale of one to 10.”
Okay, so it’s probably clear there’s some real opportunity here.
But if you’re a Mom-and-Pop investor, does it make sense to jump into a niche that’s attracting big players … or are you just cruising for a bruising?
No … and YES!
When you invest in housing for seniors it’s critical to understand the difference between a high-density community and a residential facility …
… and not just from the investor’s perspective, but from the resident’s perspective.
Let’s start with the resident …
There are some seniors … probably MOST … and their children (the decision makers in many cases) who’d rather see Mom or Dad live in a real home …
… in a tree-lined residential neighborhood, with a backyard, and neighbors … where residents don’t feel like inmates in an institution.
Please understand … we’re not slamming the great people or services provided in bigger facilities.
We’re just saying from a senior’s perspective, having a room in a home in a regular neighborhood FEELS a lot different than living in a room at a campus for old people.
But for a BIG investor, those individual homes are a logistical problem.
To move BIG money, you need economies of scale and the ability to buy or build a lot of inventory at one time.
It’s the same problem Warren Buffet alluded to when he told CNBC …
“I’d buy up a ‘couple of hundred thousand” single-family homes if I could.”
The challenge, as noted in this Forbes article about Buffet’s statement, is …
“… the cost and logistics of making such an investment in large enough size to move the needle for Berkshire Hathaway is prohibitive.”
The point is big money can’t play well at the single-family residential (SFR) level …
… even if the SFR’s are being converted into highly-profitable residential assisted living facilities.
But YOU can. And that’s why we like them. Think about it …
The supply and demand fundamentals are solid.
The priority for expenditure is near the top of the list for any family. Taking care of Mom or Dad is far from a discretionary purchase …
… so as an investor, being that far up your tenant’s payment priority ladder is a much safer place to be in uncertain economic times.
Plus, much of the money to pay you comes from insurance, government, and the senior’s estate. In other words, you’re very likely to get paid … even in a weak jobs and weak wages economy.
Also, you don’t have to compete with big money investors, even though they clearly see the opportunity and are moving into the space.
That’s because the barrier to entry for the big money isn’t how MUCH money is needed … it’s how LITTLE is needed.
Meanwhile, the customers would rather live in YOUR product than big money’s product. So while big money is adding to supply, they’re not really in your niche.
This is a BEAUTIFUL thing.
But it gets better …
Residential assisted living homes can’t be mass produced. They need to be built or converted one at a time. There’s very little threat of a big player glutting the market.
And taking lessons learned from watching hedge funds move into the SFR space … big money was only able to acquire tens of thousands of SFRs because huge blocks of inventory were available temporarily through mass foreclosures.
We don’t think there’ll be mass foreclosures in residential assisted living facilities. They’re way too profitable.
But because this kind of senior housing is in high demand and highly profitable, at some point big money will start assembling them …
… buying up groups of homes from multi-facility operators … and then buying up nearby individual facilities which can strategically integrate into existing operations.
It’s called consolidation … and when it comes, big money will bid up existing operations (creating equity for those already there) …
… because they can recover the “over-payment” through operational efficiencies and financial leverage.
Between now and then, for the street level investor, the big opportunity is to be part of building the inventory by converting homes into residential assisted living facilities …
… cash-flowing along the way … then one day cashing out to big money players.
And if those big money players never show up … just keep on cash-flowing while providing a much needed service to the community.
Until next time … good investing!