Investing in Senior Housing: Is It Worth It?

The United States’ aging population is making senior housing an increasingly attractive real estate investment opportunity.

From 2010 to 2020 (census years), the percentage of 65+ adults in the U.S. grew at its fastest rate since 1880 to 1890. For everyone who missed the promising opportunity at the end of the 19th Century, the 55.8 million seniors age 65+ present another great time to consider this real estate sector. All of those seniors need homes, and they often transition into housing that’s different from the place they’ve lived in for the past decades.

What is Senior Housing?

Senior housing generally refers to residences designed specifically for seniors aged 55 and older.

Although the Census categorizes seniors as 65+ and that’s around typical retirement age, the age used in real estate is more often 55 and older. There are a few reasons why the younger age is usually used in real estate:

• Adults in their 50s are often empty nesters, and may consider senior communities if they relocate to a different city or region
• Early retirees may consider senior communities if they buy a place and transition to a different city over a period of years
• Adults in their 50s sometimes develop health issues that necessitate moving into senior housing with supportive care before age 65

The different reasons, financial positions and health conditions require different types of senior housing. They’re all categorized as senior housing for real estate investment purposes, though.

Different Types of Senior Housing

The different types of senior housing available are based on the level of support and care that residents need. This can range from communities that support residents to live mostly independently, to facilities that provide round-the-clock and memory care.

The main types of senior housing are:

• Independent Living: For seniors who can live independently, offering communal living with access to social activities and amenities. Few, if any, personal care services are provided.
• Assisted Living: For seniors needing help with daily activities, such as medication management, bathing, and dressing. Most assisted living provides some level of medical care.
• Nursing Homes: For seniors requiring round-the-clock medical attention and care. Most nursing homes offer all of the routine medical care that seniors would need, unless they must be hospitalized.
• Memory Care Units: For seniors suffering from dementia or Alzheimer’s, offering specialized care in a secure environment. Restrictions are in place to keep seniors from leaving unattended, and other safety measures are in place. Many memory care units are a subset of an assisted living or nursing home facility.
• Continuing Care Retirement Communities (CCRCs): For seniors in all health conditions. Provides every level from independent living to nursing home/memory care at different parts of the facility. Seniors switch rooms, floors and sometimes buildings as they progressively need more assistance, but they stay in the same complex.

Note on Retirement Communities: Some mobile home and condominium retirement communities restrict residents to only those 55 years or older. While these target the senior population, they’re more akin to running a mobile home park or condominium complex. Investors who are interested in these types of properties should primarily familiarize themselves with these real estate investment properties.

Why Invest in Senior Living?

Senior living properties can be attractive to real estate investors for several reasons:

First, the senior population is large and growing. It’s already well over 55 million people in the U.S., and that number is only increasing. The baby boomer will sustain the high demand for senior housing beyond the time horizon of most real estate investments.

Second, the senior housing sector has historically shown to be more resilient than other commercial investment properties. Whereas luxury apartments, retail, entertainment and industrial are all susceptible to economic changes, seniors who need care must move into facilities that provide that care regardless of economic conditions.

Third, many seniors who are in residences that provide medical care are paying with insurance, whether public or private insurance. This provides a stable income and helps keep cash flow more consistent, allowing for regular distributions in many cases.

Potential Risks of Senior Housing Investment

While there are many good reasons to invest in senior housing, no investment opportunity is entirely free of risks. Some of the risks specific to senior housing are:

• High Initial Costs: Establishing or purchasing senior housing can be capital-intensive. This creates a higher opportunity cost. It also means more could be lost if the investment fails, although that’s much less likely than in other real estate sectors.
• Regulations: Senior housing is subject to various local, state and federal regulations. Complying with new regulations can increase operating costs.
• Insurance: When insurance pays for senior housing, investors have little ability to set rents themselves. The negotiations with insurers are more than any individual investor can sway.
• Long-Term: The extremely long-term future could lead to oversaturation of the senior housing market, as the Baby Boomer generation will eventually give way to the smaller Gen X. This is an extremely long-term risk, however, and beyond the time horizon of most real estate investments.

Is Senior Housing a Good Investment?

Senior housing can be an excellent real estate opportunity for the right investment.

Senior housing requires more capital than a single-family house, and few other sectors have the same level of regulations or specialization. Few other sectors provide the same growth opportunity, stability and cash flow, however, and those three factors are a recipe for great potential success.

Senior Housing Market and Growth

As stated, the senior housing market is growing at historic rates. The population 65 and older is more than 55 million, and the demographic is only larger when dropping the age down to 55 and older. The sector is expected to reach 80 million by 2040 — a rate that hasn’t been seen in more than 100 years.

How to Invest in Senior Living?

Investing in senior living can be approached in various ways, depending on an investor’s resources, expertise and preferences. Whether you’re looking to directly own a property or seeking indirect investment avenues, here are some options:

• Direct Purchase: Buy or develop properties to lease or sell to seniors.
• Real Estate Investment Trusts (REITs): Purchase shares in an REIT that many people participate in. Senior-specific REITs are available.
• Join a Partnership: Join a smaller group of investors who purchase specific senior housing projects.

Financing Options for Senior Living Investment

Because senior housing is a unique type of investment property, there are financing opportunities specific to the sector and general opportunities. Common sources of financing are:

• Traditional Loans: Banks and other financial institutions provide loans tailored for real estate investments.
• Private Equity: Private equity firms specializing in senior housing provide capital in exchange for an interest in the property purchased.
• Government Programs: Some government programs offer incentives or financing for senior housing projects. HUD and the SBA both have options.

Wrapping Up

Senior housing has a larger barrier to entry than some other commercial real estate investment opportunities, but those who break in can reap excellent rewards in the right situation. Explore the various avenues available for entering, and you could realize the potential of a different real estate sector.