Underwriting Assisted Living

The Real Estate Espresso Podcast

Underwriting Assisted Living

Spotify Google Podcast Apple Podcast Subscribe via RSS Leave a Review

Underwriting Assisted Living

Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re talking about distressed deals in senior housing and whether they’re indeed good deals or not. Let’s talk about the underwriting for senior housing.

Some of you may know that I’m the builder of senior housing, and currently part-owner in an 80-bed facility that we built back in 2021. This particular project is located along the Gulf Coast of Louisiana, where we built 80 beds of assisted living and memory care.

There’s no question the need is acute for both assisted living and memory care. Assisted living has a reputation for being expensive, but as with anything, you have to ask the question, compared to what?

My frame of reference is that the cost of in-home care, if you maybe have a family member who is ~~in FIRM~~ 📝infirm and they need three shifts of around-the-clock care, that’s going to be incredibly expensive.

The math is pretty simple. Take the number of hours in a year and multiply that by an hourly rate. So you take 365 multiplied by 24, and even if you’re only paying 20 bucks an hour, which is not a very high rate for a trained caregiver, that comes to 175,000 a year.

With someone who knows the cost structure of operating these facilities, it should come as no surprise that labor is far and away the number one cost. Assisted living is first and foremost a service business. When you can share that help amongst a number of residents, you can get some substantial savings.

Our facilities operate with a caregiver ratio of 5.3 to 1 during the day, and 16 to 1 at night. The industry average is more like 16 to 1 during the day, and 32 to 1 at night. Now, frankly, I consider that to be a sub-standard level of care.

There are several different financial models for these types of facilities. Some are subsidized by various government programs or charitable foundations. Some are menu-based, where you pay for each individual service. For example, you might pay extra for each load of laundry.

The high-end assisted living facilities typically price between $8,000–$12,000 per bed per month. Mid-range offerings are in the range of $5,000–$6,000 a bed, and budget offerings are around $3,000 a bed.

Now, let’s break down the difference. If your loved ones need a certain amount of care, that doesn’t imply a five-star level of luxury. Required care is the same irrespective of how much money you earn, or how much money you can afford.

You can offer that level of care in a nicer setting or a more expensive building, but the care needs are the same based on care standards. You can offer more expensive or less expensive food, but that’s a minor cost compared with the cost of high-quality care.

What I want you to understand from this discussion is that you can get a bargain on the real estate component, and you can cut corners on the food and the transportation, but if you cut corners on the level of care, then the experience for your loved one is going to be terrible, and we’ve seen it.

Folks that come to our facilities generally started somewhere else, and then they hated it.

When you reverse engineer the cost structure for these facilities, you quickly discover that the profit margins can be incredibly thin, especially for the lower-end and mid-range offerings.

Blackstone Group made a major investment in senior housing starting in 2017. They bought nearly 50 buildings and lost money on all of them.

Part of that was bad timing, with the pandemic causing a significant drop in occupancy. Then they faced a surge in labor costs. They also had variable debt on their properties. Most of these properties were sold between a 30% and 70% loss, with many of these sales starting in 2022.

There was recently an in-depth article on the failed Blackstone investment in the Wall Street Journal. When I read the article, none of it was a surprise to me. Of course, Blackstone would’ve ventured into the business thinking they could add value to the property and then experience some substantial profit on the sale a few years later. But they were incorrect about that assertion. When I read the article, none of the outcomes were a surprise.

~~of one of the largest senior housing operators in the nation.~~ 📝Blackstone had partnered with one of the largest senior housing operators in the nation. But we’ve also hired staff from Brookdale. And we learned what their skills were. They were not up to our standards.

So when we hire staff, we train them ourselves. We don’t expect them to come in with the training from a Brookdale or any other large operator. Most big operators suffer from extremely high staff turnover.

The mid-market position product has no room to increase rates and is subject to highly variable expenses that come with the industry.

I was speaking recently with someone who just purchased a distressed assisted living property for $50,000 a bed — a massive discount compared to the replacement cost of a new facility. He thought he was getting a great deal. But he couldn’t tell me what his caregiver ratio was. And he couldn’t tell me what his cost structure was going to be.

And the problem is, they’re not going to operate it. They’re merely outsourcing the operation to another operator.

See, senior living is not about real estate. Real estate’s a small component. It’s first and foremost a service business with a minority real estate component.

It’s a bit like comparing a beachfront resort as a real estate play. Well, that’s about the food, and the beach, and the amenities, and the service. Even a great location won’t be enough to create a winning investment. Just look at all the dead, abandoned hotels in the Hotel Zone in Cancun. They’re right next to winning properties. So clearly, it’s not about the real estate.

Our facility is currently at 100% occupancy. It took four years to achieve that, and it was a difficult road to get to that point. And that success is 90% operations as well as having a well-designed facility. But that’s essential and not enough.

As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

Stay connected and discover more about my work in real estate and by visiting and following me on various platforms: