Drawn by steady cash flow and a desire for intimate home settings, small investors are converting single-family homes into assisted living
By Joe Gose
Mom and pop investors have long dominated the market for single-family rentals, which provide an attractive cash flow, a hedge against inflation and the ability to use someone else’s money to build equity.
But with the elderly population surging, small investors are showing increasing interest in converting single-family residences into private pay, non-medical assisted living homes for generally six to 12 residents. The homes typically provide basic services found in traditional assisted living communities — housing and meals, transportation, and help with activities of daily such as bathing or getting dressed — but do not have skilled medical personnel on site.
The appeal: to provide seniors with a higher caregiver-to-resident ratio in a more familiar setting than big-box seniors housing facilities, while reaping cash flow well beyond what the investors could pocket from simply renting the houses to conventional occupants.
The mortgage, payroll and other operating costs for what are frequently referred to as “family care homes” typically run about $15,000 to $20,000 a month, depending on the location, services and size of the house, explain operators.
But the homes fetch monthly rental rates of between $4,000 and $6,500 per client — or even more for a higher level of care or more luxurious accommodations — creating a revenue stream that far exceeds the expenses. Unlike large traditional assisted living facilities, which typically charge residents base rent and then add meals and other services for additional costs, monthly rent in a family care home covers those extras.
“People are beginning to see this as an investment opportunity that you just can’t ignore,” says Gene Guarino, owner of three family care homes for 10 clients each in the Phoenix area. Guarino is expanding his portfolio to five homes. “Seniors are where the future is.”
An entrepreneur who bought a few dozen houses in Arizona after the financial collapse and flipped them to hedge funds, Guarino began pursuing the family care home strategy about four years ago. Additionally, as president of Residential Assisted Living Academy, Guarino has been teaching investors how to get into the business for the last three years.
Yet he and others are quick to acknowledge the challenges and risks. Many students that leave Guarino’s three-day seminars gung-ho eventually hit a wall when it comes time to craft business plans and policies, create a marketing strategy, and find financing and dependable workers, he acknowledges.
Consequently, a year ago Guarino began selling supplemental support to help his students with site selection, business plans, design review and other operational details in an effort to move them further into the process, he says.
At the same time, growing regulatory burdens are eating into family home care profits, says Doug Stark, president of Wichita, Kan.-based ComfortCare Homes, which houses patients with memory issues.
The 13-year-old company operates eight houses that serve six to eight residents each. Two years ago, ComfortCare built a 30-bed home for patients in the late stages of Alzheimer’s, Parkinson’s disease or dementia.
The company employs about 80 people and generates some $5 million in annual revenue, he discloses, but its profit margin has declined to 10 percent from as much as 18 percent a decade ago.
What’s more, says Stark, undercapitalized but overeager mom and pop investors often don’t realize that they’re on the hook for the full monthly expense tab of around $15,000, regardless of whether a family care home has one occupant or eight. From the moment they open the door, he adds, they’re in competition with every other facility in the area.
“The easiest thing to do here is buy a home — anyone can do that,” says Stark. “Running these homes is extremely difficult.”
A niche getting notice
The family care home concept is hardly new. Residential assisted living facilities run by mom-and-pop investors have been around in one form or another for 40 to 50 years, say operators, and today several thousand operate across most states.
States license the homes and typically establish a maximum number of residents: Many cap it at four to six but others allow more — Arizona’s limit is 10 and Kansas’ limit is 12.
States also define and label the homes differently. They’re known as “Adult Family Care Homes” in Florida, “Residential Care Facilities for the Elderly” in California, “Home Plus” care facilities in Kansas, and “Residential Care Homes” in Minnesota, to name a few.
Determining the size of the fragmented niche in the United States has been challenging. In a report entitled “Compendium of Residential Care and Assisted Living Regulations and Policy: 2015 Edition,” which summarized state residential care policies, the U.S. Department of Health and Human Services (HHS) included the homes in a broad “Adult Foster Care” facility category.
But HHS acknowledged that variations in how states define residential care properties blurred the distinctions between the homes and other care settings.
Still, some states separately track the number of the small operations. Some 640 family care homes that can house up to six residents each operate in North Carolina, according to the state’s Department of Health and Human Services, while Florida lists 387 “Adult Family Care Homes,” which can house up to five residents, according to the state’s Agency for Health Care Administration.
Patient needs and desires will ultimately drive the popularity and growth of the residential assisted living niche, says Beth Burnham Mace, chief economist and director of capital markets outreach with the National Investment Center for Seniors Housing & Care based in Annapolis, Md.
Just by their sheer size, traditional seniors housing facilities can provide more amenities and activities than family care homes, she explains. Residents in a traditional setting are also likely to have more privacy because they aren’t sharing bathrooms or in some cases, bedrooms, adds Burnham Mace.
“The flip side is that patients have more of a one-on-one relationship with one or two caregivers in a residential facility,” she says. “The advantage of a smaller place is that patients could have a more relaxed, cozy and intimate environment, and those are things that bigger companies are trying to create. But it depends on whether the person who is getting the services wants it.”
Early on in the cottage industry’s life, children of aging parents often opened family care homes after they failed to find acceptable housing at larger institutions. But entrepreneurial curiosity about the strategy has been growing over the past several years.
Unlike the investment surge in foreclosed and underwater homes following the financial crash, however, the family home care expansion has been driven by the burgeoning elderly population, operators maintain.
Neil Barnett, president of Prairie Village, Kan.-based Care Haven Homes, which cares for patients with dementia and Alzheimer’s, opened his first home in Johnson County a decade ago and is close to opening his sixth. Most of his homes have room for eight residents.
“Expansion wasn’t really driven by the value of real estate,” he says, “It was just the fact that our business had developed to the point where it was time to buy another home.”
In Kansas, more than 130 family care homes are in operation, according to the state’s Department for Aging and Disability Services. That represents a three-fold increase in the number of facilities over the last 10 years, adds Barnett, who formerly was a director at Sprint Corp.
Similarly, Falkirk Assisted Living, which operates three homes for six residents each in communities south of Detroit, was one of the early players in the local area when it opened its first facility in 2007, says Robert Ice, administrator for the company. The number of family care homes nearby has climbed to 15 today.
“It’s growing as more people find out about them,” adds Ice, whose wife launched Falkirk after she began losing her home healthcare clients to assisted living facilities. “A lot of people are jumping on the bandwagon.”
Guarino typically attracts around 30 people from around the country to his seminars, which he holds about every month. Ideally he would like to see his efforts lead to the opening of 1,000 family care homes over the next three years. Assuming that each new investor opens an average of three family care homes, he projects that 333 new operators will fulfill his goal.
“We have some students on their sixth home, others that are on their first and others that still haven’t got off the starting line,” he says. “But everyone can do it.”
Capitalizing on investors’ interest, operators like ComfortCare, Falkirk and Wake Forest, N.C.-based Haven Family Care Homes have launched franchise programs. ComfortCare has added licensees in a handful of Kansas towns and Omaha, Neb., for example, and three franchises operate under the Haven Family Care brand with another three set to open later this year.
Haven Family Care opened its first corporate home in 2005 and is in the process of increasing its portfolio to seven houses from five in North Carolina and opening an eighth home with a partner in suburban Dallas, says Esther Cromwell, who co-founded the firm with her husband. The team decided to offer franchises in 2012 after clients urged them to grow.
“We wanted to expand the business, but we didn’t want to water down what we have,” explains Cromwell. “At the same time, we certainly saw a need for what we do. Running these homes efficiently where you’re continuously profitable — that takes a lot.”
The increasing interest among small investors in family care homes also parallels a broader shift toward smaller communities. In 2010, facilities with four to 25 beds dominated the long-term care landscape, making up 65 percent of assisted living and residential care properties, according to the AARP Public Policy Institute.
But they housed only 19 percent of residents.
Family home care proponents contend that a growing number of families with elderly members are focusing on the higher ratio of caregivers to residents that their properties provide, as well as the comfort and familiarity of a home setting and a dining room that’s 10 yards rather away than 100 yards down the hall.
“If you look at advertisements for any kind of long-term care, you’re going to see phrases like ‘all the comforts of home’ or ‘just like home’ or the ‘feeling of a home,’” says Stark. “We’ve never had to say that because we are a home.”
Paths to ownership
The most common way that family home care operators get into the business or expand is by purchasing large ranch houses, preferably on flat lots in upper-end neighborhoods. They then install sprinkler systems, widen doors to accommodate wheelchairs, mount grab bars in bathrooms and other areas, replace stairs with ramps, and add bathrooms and bedrooms, among other upgrades.
All in, buyers spend $450,000 to $750,000 up front, says Barnett. Investors generally secure acquisition financing from banks or can tap into their equity in a primary residence or investment property to pay for the upgrades and additions.
But operators are also building new single-family care homes where it’s difficult to find suitable properties or to justify the cost of an acquisition and upgrade.
Haven Family Care has built one new family care home and is in the process of building two more in North Carolina after purchasing and converting four existing houses. Falkirk has constructed all three properties in its family home portfolio.
“Buying an existing house and converting it is about the same price as building new, so we chose the path to build,” states Ice.
If the investors intend to operate the homes, they must obtain a state license and find state-certified workers to staff the houses 24 hours a day, among other requirements.
To bypass the regulatory headaches, some single-family home investors are beginning to simply lease homes to operators for a number of years, which allows the landlords to focus on their strategy while still fetching twice the market rent, say Stark and Guarino.
Buying and converting an existing house may take six months to a year to prepare it for occupancy, and new construction can take one to two years, says Guarino. Investors can also buy existing family care homes, which is the quickest route to getting into the business, he asserts. Yet it’s also the trickiest to finance because it’s a residence that houses a commercial business.
“It’s kind of an oddball property for lenders to consider,” says John King, founder of Green Commercial Capital Corp., a Roswell, Ga.-based mortgage banker. “I don’t think most lenders know what a residential care facility for the elderly is.”
A few lenders provide acquisition financing through Small Business Administration programs, he says, but often those include fees of nearly 3 percent. Buyers can also tap hard-money lenders, private investors or self-directed Investment Retirement Accounts to fund purchases, adds Guarino.
Family home care operators say they have yet to see debt or private equity funds specifically serve their niche, and they recognize that it’s easy for institutional capital sources to overlook the strategy in favor of larger seniors housing companies that are in a robust expansion mode. But that could change, they contend.
“Right now older folks are coming fast and furious and they’re living longer — larger institutions can’t build facilities fast enough,” says Guarino. “Once they’ve built all they’re going to, I think they’ll begin to look at the smaller operators, especially those that have 10 or 20 single-family homes in a market.”