Senior housing investment isn’t exactly a new concept, but now is a uniquely good time to start investing in this type of business.
As the American population ages, senior housing investments have a growing demand and proven investment growth, making them an excellent opportunity for just about anyone.
But what exactly are senior housing investments, and why should you consider investing in them?
This article will answer all your questions about the various types of senior housing investments available and the advantages and risks. By the end of this article, you’ll have a comprehensive understanding of senior housing investments and whether they may be the right investment opportunity for you.
What are senior housing investments?
Senior housing is a part of the real estate sector that provides housing specifically for seniors. These housing options range from independent living facilities to skilled nursing facilities, meaning they can serve seniors of all ages and health levels.
In many ways, investing in senior housing is similar to investing in any other type of real estate. Investors can opt for either an active or passive level of involvement and, in exchange for their investment, they’ll receive benefits such as a recurring income and long-term investment growth.
Of course, buying and managing a senior housing facility isn’t practical for most people. The good news is that, while investing in senior housing once required someone to purchase a facility themselves, REITs now allow anyone to invest in and profit from it with a small upfront investment.
Types of senior housing
When it comes to senior housing, there are several different types of facilities. As an investor, you can invest in just one type or diversify your portfolio and invest across the board.
Active adult communities, previously known as 55+ communities, are independent living facilities specifically designed for individuals ages 55 and older.
Some facilities are age-restricted, meaning most residences must have someone 55 or older living there, while others are age-targeted. In other words, they’re marketed to people ages 55 and older but not limited to that demographic.
Active adult communities tend to attract younger seniors and have fewer amenities and healthcare services than other independent living facilities. As a result, active adult facilities tend to operate more like ordinary apartment buildings.
An independent living facility is similar to an active adult community, but it tends to cater to slightly older seniors and offers more amenities. For example, independent living facilities may have healthcare services on site. They also often provide daily housekeeping, meal preparation, and other services.
This type of senior housing is intended for those individuals who need more support on a day-to-day basis than would be provided in independent living but don’t need skilled nursing.
Assisted living facilities offer housekeeping, meal preparation, laundry, transportation, social programs, and more. They also have round-the-clock staff to assist residents and provide certain healthcare services.
A memory care facility is a type of senior housing designed for those suffering from Alzheimer’s and dementia. These facilities have greater security to keep residents safe and have more hands-on care than independent living or assisted living facilities and more specialized care than other skilled nursing facilities.
This type of facility is designed for seniors who need a greater level of care than they would get in an assisted living facility. These facilities have doctors and nurses on staff to provide regular inpatient care. Skilled nursing facilities also offer rehabilitation services and are often used by seniors who are leaving a hospital stay but plan to return to their own homes when ready.
Continuing Care Retirement Community (CCRC)
A CCRC — also known as a life plan community — is designed to house seniors through various phases of the aging process. These communities include a broad spectrum of senior housing, from independent living to assisted living to skilled nursing. In addition, these communities allow seniors to spend their senior years in the same facility.
Why invest in senior housing
Senior housing has several key benefits for investors. Let’s discuss a few of the biggest.
One of the most significant benefits of investing in senior housing is the high demand, both today and in the future. According to data from the U.S. Census Bureau, by 2030, all baby boomers will be 65 or older. Additionally, roughly 20% of the population will be at retirement age.
And along with the sharp rise in the senior population will come a significant demand for senior housing. And it’s not just that there are more seniors today (and in the future).
People today are also living longer. As a result, they’re more likely to spend more years in senior housing than previous generations. In addition, they may go through several different types of senior housing during their older years, from active adult to skilled nursing facilities.
Besides the high demand, senior housing facilities have a low supply. Right now, there are simply not enough beds in senior living facilities to house everyone who wants to live in one.
According to data from the American Health Care Association and the National Center for Assisted Living, there are currently about 1.2 million beds across more than 30,500 assisted living facilities. But there are nearly 72 million baby boomers. And as that generation ages (and potentially lives longer than previous generations did), the current supply of beds and facilities simply won’t be enough.
This is good news for investors since it likely means there will be a boom in new senior housing facilities in the upcoming years.
Potential for growth
Another key benefit of senior housing investments is their proven long-term growth potential. According to data from the National Investment Center, when compared to other forms of real estate, senior housing had some of the highest annualized returns from 2010 to 2020.
Over one year, senior housing investment returns were on the lower end, behind industrial real estate, office buildings, and apartment buildings. But senior housing outperformed all but industrial real estate over a longer term — in this case, three-year, five-year, and ten-year periods.
This is excellent news for buy-and-hold investors who plan to add real estate to their portfolios and allow it to grow for many years.
A final benefit of senior housing investments is that, unlike many of the stocks in your investment portfolio, senior housing investments can provide a steady source of income.
As we’ll discuss later, REITs pass along at least 90% of their profits to their investors as dividends. So rather than only making money when you sell your investment, you’ll receive regular income throughout the year. You can use that money as an additional source of income for your household or to reinvest in more senior housing (or other types of real estate).
How to invest in senior housing
You’ll have several options if you’re considering investing in senior housing.
Of course, your first thought might be to open or buy a facility. You might especially consider going this route if you’re particularly passionate about improving the quality of life for seniors.
Unfortunately, most people who want to invest in senior housing can’t afford to go that route. So instead, these facilities are typically run by companies rather than individual investors.
Investing in senior housing without owning and operating a facility is still possible. REITs can be diversified or focused on specific varieties of real estate. For example, a senior living real estate investment trust will focus on senior living properties.
Owning shares in a REIT is similar to owning shares of stock. When you buy shares in a REIT, you become a partial owner of the properties included in the trust’s portfolio. And once you’re an investor, you’ll receive a share of the income generated by those properties. In fact, REITs must pass along at least 90% of their profits to shareholders.
Many REITs are publicly traded, meaning you can simply purchase them on a stock exchange through your brokerage account like any other stock. However, there are also non-traded and private REITs. While these REITs may have certain benefits, they also have some downsides, including lock-up periods. Additionally, many non-traded and private REITs are only available to accredited investors, which are individuals with high incomes or net worths.
Risks of senior housing investments
We’ve already discussed some of the benefits of investing in senior housing, but it’s also important to understand the risks before you get started. Here are a few risks and downsides to consider before investing in senior housing:
Many industries have faced staffing shortages for several years. Senior housing facilities have been a tough hit. Many facilities have had to turn away residents, which has affected their bottom line.
Given all the services they provide, it is unsurprising that senior housing facilities have high operating costs. Unfortunately, this means less profit is left for shareholders than might be with other types of real estate.
The costs are even greater if you want to take a more hands-on approach to owning and operating a facility. Unfortunately, this comes with high start-up costs that most people can’t afford. And even if you decide to invest through REITs, some non-traded and private REITs may have high minimum investments that not everyone can afford.
Most industries are subject to some regulations, but because senior housing overlaps with the healthcare field, it is subject to more regulations. The state and local governments can pass new regulations at any time.
REITs — including those that invest in senior housing — are vulnerable to economic changes, including rising interest rates. Because REITs rely so much on leverage (aka borrowing), their expenses increase as interest rates do, reducing the value of the investment.
They may also be vulnerable to other economic vulnerabilities. For example, if the demand for senior housing were to decline suddenly, as it did during the pandemic, then investors could lose money.
As mentioned above, non-traded and private REITs often have lock-up periods, meaning you must keep your money invested for a certain amount of time — potentially years — before you can pull it out. These lock-up periods affect the liquidity of the investment since you can’t quickly sell your shares when you need cash.
It’s worth noting that this downside is specific to certain types of REITs and isn’t necessarily a characteristic of senior housing in general. You can avoid these lock-up periods by opting to invest in publicly traded REITs.
Senior housing can be an excellent investment for someone considering adding real estate to their portfolio.
Like any investment, senior housing does pose some risks for investors. For example, senior housing facilities and REITs are vulnerable to rising interest rates, staffing shortages, and high operating costs.
However, these investments have many advantages, including rising demand, low supply, and proven long-term growth.