Investing in Senior Housing: What You Need to Know

As America ages, the demand for homes and care for older folks will increase, presenting some recession-resilient investment opportunities.

An older man gets help shaving from a health care aide.
(Image credit: Getty Images)

There are several benefits to investing in senior housing. However, it can be difficult for individual investors to break into the sector. Understanding the lay of the land and working with seasoned professionals could be an efficient way for investors to get involved.

Senior housing could be an attractive real estate sector for investors because of the sheer number of people who might soon need it. According to the Population Reference Bureau (opens in new tab), there are 76 million Baby Boomers in the United States. The oldest members of the Baby Boomer generation are now entering their mid-70s, and the youngest are approaching their 60s.

Growing Health Care Demand

Chronic disease is the leading cause of health care spending (opens in new tab) in the U.S. today. Currently, some 50% of the U.S. population has a chronic disease, creating an epidemic, and 86% of health care costs are attributable to chronic disease. As America ages, the demand for senior housing and care will increase.

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According to the National Investment Center (opens in new tab), "Senior housing and care is the only commercial real estate asset class that experienced positive asking rent growth during the Great Recession." Because it is a needs-based investment where the tenants rely on the amenities and services provided, it is “recession resilient” to an extent. This makes it a stable investment option for investors looking for recession-resilient opportunities.

First, what are the types of senior housing? Senior housing is a broad classification for housing communities that cater to long-term residents over a certain age. Before investing in one of these facilities, you should understand their specialties and how they differ.

  • Independent living communities. These are usually one- to two-bedroom apartments with kitchens and laundry facilities with supportive services such as meals, housekeeping, laundry, fitness classes, social activities and transportation. However, some are strictly residential units where 55-plus adults live without the option of additional services.
  • Assisted living facilities. These are designed with private or semiprivate units to house residents with disabilities or who are unable to live independently. In addition to the supportive services independent living offers, these facilities help with activities of daily living such as bathing, grooming, eating, dressing, toileting, shopping, managing money and work with outside health care providers ensuring residents receive the care they need. Differences exist between the services and level of care offered from one assisted living facility to the next because of state regulations. 
  • Memory care facilities. These are licensed health care facilities that specialize in caring for senior adults living with Alzheimer's disease, dementia and other cognitive impairments. These facilities provide an environment for residents to continue to live engaged, social and active lifestyles while an on-site nursing staff meets their physical and emotional needs. In addition, these facilities are highly secured to protect residents who are prone to wander. While many memory care units operate independently, others are special care units within a general assisted living facility.
  • Skilled nursing facilities. These have licensed nursing staff 24 hours a day for patients requiring round-the-clock care. Often, these facilities offer rehabilitation and other specialized services to those recovering from an accident, surgery or other health issues. These services could include physical therapy, speech therapy, occupational therapy, social services, medications and other services necessary to the health and wellness of the patient. These facilities are more appropriately defined as senior care rather than senior housing. The patient's stay is usually shorter term, and they can receive a higher level of treatment than the previously mentioned facility types.

Operations and Acuity Levels

Senior housing facilities can differ significantly in their acuity or level of care. The level of care required of a facility completely changes how the property is operated and, ultimately, how the facility is valued.

Operations are tied directly to the underlying real estate, so working with someone highly experienced in the senior housing real estate space is essential when purchasing in these asset classes. In addition, understanding the operating business is crucial to making an intelligent investment. The operator is responsible for maintaining regulation compliance, bringing in staff and attracting customers.

Overall, you want to ensure a prospective investment has management you can trust on an operational and investment acquisition level.

Senior housing encompasses several benefits and risks as an investment in both a property and a business. Make sure you understand the risk and choose eligible properties that can mitigate those risks. Lawsuits, staff turnover and heightened regulations are essential to consider. In addition to the risks commonly associated with real estate, senior housing has some unique challenges. As we saw during the pandemic, legislative risk can present material headwinds to cash flow, occupancy, and expenses.

Furthermore, there may be risks associated with the success of the management of the facilities, depending on the investment vehicle selected to invest in the sector. These potential risks are not a reason not to invest, but they illustrate the importance of strategic investments.

How Can You Invest in Senior Housing?

Purchasing a senior housing facility outright as an investment is out of reach for most, but that doesn't make it inaccessible to real estate investors overall. Vehicles like Delaware Statutory Trusts (DSTs) and Real Estate Investment Trusts (REITs) provide more affordable options for investors to purchase senior housing investments.

A DST structure is an option that allows a group of investors to purchase a fraction of a property. DSTs are reserved for accredited investors, so they may be out of reach for some investors. However, they also qualify for 1031 exchanges for tax-efficient real estate investing, whereas REITs do not.

A REIT allows investors to pool their money to purchase a property. This option is suitable for investors who either don't have a high net worth or don't want to spend too much on one investment and would like a passive way to invest in real estate — the investor purchases shares of a company that owns the property.

Investing in senior housing through these vehicles could be an excellent way for investors to enjoy the benefits of owning real estate without having the challenges of being the landlord. The sponsor will take care of the facility's day-to-day operations, allowing the investor to enjoy passive income in the long term.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab).

Edward E. Fernandez
President and CEO, 1031 Crowdfunding

Edward Fernandez is President and Chief Executive Officer of 1031 Crowdfunding (opens in new tab). With three-year revenue growth of 482%, 1031 Crowdfunding received ranking No. 1348 among America’s Fastest-Growing Private Companies on the Inc. 5000 list. Mr. Fernandez holds FINRA Series 6, 7, 24, and 63 licenses and is a Forbes Business Council Member. He has over 20 years of inside and outside sales experience and is personally involved in raising over $800 million of equity from individual and institutional investors through private and public real estate offerings. He is highly skilled in the simplification of highly complex real estate strategies and sophisticated investments and is regularly featured on Forbes, Inc., and the TD Ameritrade Network.