FOLLOW THE MONEY IN RESIDENTIAL ASSISTED LIVING & TYPICAL RENOVATIONS – Gene Guarino
How much can I make? That is a common question I get when people come to the Academy to learn about Residential Assisted Living. There are 2 directions that you can go.
- Own the Real Estate and rent it to an operator
- Own the Real Estate AND operate the Residential Assisted Living business as well.
If you own the home and lease it to an operator, you can get up to twice the fair market rent. As a real estate investor, that’s going to change your positive cash flow from a few hundred dollars to potentially a few thousand dollars a month. Significantly better. In addition, your tenant will want a longer lease. 3, 5 or even 10 years.
They will not want to lose their lease. Typically, they will also be a lower impact tenant that will take care of the property better than the average tenant. They are generating income and they will want the home to be kept up and well maintained to generate that income.
You may be asking, why would someone be willing to pay you up to twice the fair market rent for your home? Simply put, they will be making a huge profit, so it works for them. Location is the key. If you have the right location and the home is the “right” home for operating this business, then it is a win-win situation. Many people can’t or choose not to buy the location they operate their business in. Not everyone is a savvy real estate investor like you.
Zoning is one of the first considerations. Many people are surprised when they discover that this can be done in a residential neighborhood even with an HOA. Knowing the best locations and then knowing the terms and the questions to ask are critical. Without that knowledge you will most likely make costly mistakes and get a simple response of “you can’t do that” from the town or city that your property is in. Knowledge is power.
The amount of rent you charge will depend on many factors including: what improvements are you willing to do, what are you willing to allow the tenant to do, length of the lease, rent concessions etc. How much profit can the operator of the home make? The national average for a private room in an assisted living facility is $3,750 per month per person. If your home is licensed for 10 residents, that is $37,500 in potential gross income. If the expenses and the debt service total $27,500, which is conservatively high, you are still netting $10,000 a month in profit. If you focus on a “nicer” home you can charge higher then average rent. The expenses are virtually the same with just the potential increase in the debt service. If your debt service increases by $3,000 a month and you can generate an additional $10,000 to $20,000 a month, that’s pretty simple math.
TYPICAL RENOVATIONS FOR A RESIDENTIAL ASSISTED LIVING HOME.
The size of the home, the number of bedrooms and bathrooms and the layout are all major considerations when it comes to choosing a home for Residential Assisted Living. In general, bigger is better. More bedrooms and bathrooms means more revenue. Private rooms bring higher income then shared rooms. Private bathrooms can generate an additional $500 to $1,000 a month in additional revenue. Interior space can be reconfigured to create additional bedrooms. Adding bathrooms is significantly harder and more costly though. BUT adding bathrooms will create additional revenue that will typically pay for themselves in less than 1 year. Converting a large bathroom into 2 smaller ones is an alternative. Converting under-utilized rooms into bedrooms is typical as well. Consider converting garage space and porches into revenue generating bedrooms and bathrooms as well. Always use licensed contractors and get the proper permits when doing this type of work.
If required, you may need to install a fire suppression system in the home. This can cost $10,000 to $25,000 depending on many factors. Installing a smoke detection system that is monitored by an outside service may be required a s well. That is $1,500 to $3,000 to install and $30-$50 a month to monitor. If these types of improvements and costs “scare you” at this point, I understand but you have to look at the cost to benefit ratio. If you invest $30,000 in these renovations and it allows you to make $10,000 per month in net revenue, how long is the “payback” period? Just 3 months. That is simple math and answers the question, “is it worth the effort?”
If you add an additional $30,000 in improvements that allows you to generate an additional $5,000 a month, would that be a good investment? Many real estate investors will remodel a kitchen or add a pool or an addition or a deck, that could cost more than that and would only generate a fraction of the revenue that a Residential Assisted Living Home would generate.
The most common improvements to a home address the safety of the residents. Grab bars installed in the shower and around the toilet are common. If you are 85 years old, it’s harder to get up and to keep your balance. They are not expensive and they are pretty easy to install. Consider widening the doors as well. It doesn’t need to be every door, focus on the doors they will be using the most. 36 inches wide is great. If a senior has a walker or a wheelchair, that’s a real plus. If you can’t widen the door way consider an offset hinge. For $15 it gets the door out of the doorway about inch. An inch doesn’t sound like a lot, but if you’re a senior and using a walker or wheelchair, that inch is going to save your knuckles.
Smooth floors means less of a trip hazard. Carpet is softer but it also increases the potential for a fall because seniors may not lift their feet when they walk and they can actually increase the risk of a fall.
Good smooth surfaces to consider include: hard wood, tile, linoleum and vinyl.