Senior living funds are an increasingly popular investment option. With the aging population growing, the demand for senior housing is increasing, and the supply is not keeping up. This has created a need for newer and better senior living facilities, making senior housing a lucrative investment opportunity. Senior living funds offer investors the chance to put their capital into senior living communities, organisations, or both. There are several ways to invest in senior living, including Real Estate Investment Trusts (REITs), direct private investment, and investing in private funds. Each option has its own advantages and disadvantages, and investors should carefully consider their goals and risk tolerance when deciding which route to take.
Characteristics | Values |
---|---|
Investment type | Real Estate Investment Trusts (REITs), Direct Private Investment, Private Funds |
Demand | Growing demand due to ageing population, especially Baby Boomers |
Supply | Shortage of supply, low construction starts |
Returns | 7.50%–21.00% projected annualised rates of return, 11.4% average annual return over the past 10 years |
Risk | Low risk, recession-resistant |
What You'll Learn
Senior Living Communities
Investing in senior living communities can be a lucrative opportunity. The demand for senior housing is expected to increase significantly in the coming years, with the number of Americans aged 65 and older projected to rise from 56 million in 2020 to 79.2 million by 2035. This growing demand, coupled with a shortage of supply, makes senior living communities an attractive investment option.
There are several ways to invest in senior living communities:
Real Estate Investment Trusts (REITs)
REITs offer investors an ownership stake in commercial real estate property through public markets. They provide an accessible way to invest in senior living communities, as they are traded on public exchanges and do not require institutional knowledge or qualifications. However, REITs may limit upside potential compared to direct or private investments, and investors typically have less control over strategic decisions.
Direct Private Investment
Direct private investment in senior living communities involves finding an operator and a developer. Investors need to partner with a capable and experienced management team and a developer with the talent and expertise to convert or build a property that meets the unique regulatory requirements of senior living communities. While this option offers high upside potential and more control over strategic decisions, it also carries higher risk, and finding an experienced developer and operator can be challenging.
Private Funds
Private funds allow investors to pool their capital with others to invest in senior living communities. This option can lead to high returns and reduced risk compared to direct private investment. However, investing in private funds often depends on personal connections, and investors must meet certain income or net worth thresholds to qualify.
When considering investing in senior living communities, it is essential to conduct thorough research and due diligence. Investors should carefully evaluate the location, facility design, developers, and long-term operators to ensure the success of the investment. Additionally, it is crucial to consider the demographic trends and the specific needs and preferences of the target senior citizen population.
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Real Estate Investment Trusts (REITs)
REITs have several advantages for investors:
- They are traded on public exchanges, making them accessible to anyone with a brokerage account.
- They don't require institutional knowledge or qualifications, unlike other investment avenues.
- They offer passive income through high dividends and tax advantages.
- They are highly transparent, providing audited financial statements.
- They are relatively inexpensive to buy, with most shares trading below $100 each.
However, there are also some disadvantages to consider:
- They often limit investors' upside potential compared to direct or private investment.
- Investors typically have less control over strategic decisions.
- They are sensitive to interest rate changes, which may affect their performance.
- They have higher tax liabilities due to non-qualified dividends.
To invest in a REIT, simply open an online brokerage account. However, it is important to do your research beforehand, as these investments are like any other security traded on the public exchange.
There are different types of REITs to consider:
- Publicly traded REITs: These are traded on major stock exchanges like the NYSE and Nasdaq. They are accessible to anyone with a brokerage account and must register with the U.S. Securities and Exchange Commission (SEC).
- Public non-traded REITs: These are also open to all investors but are not traded on stock exchanges. They can be purchased through a financial advisor or online portals.
- Private non-traded REITs: These are not available to the public and are usually only accessible to high-income earners or high-net-worth individuals.
Additionally, REITs can be classified by their asset type:
- Equity REITs: These own and operate income-producing real estate such as apartments, office buildings, and warehouses.
- Mortgage REITs: These provide financing for real estate by investing in mortgages and mortgage-backed securities.
- Hybrid REITs: These invest in both income-producing real estate and real estate-backed loans.
Within these categories, there are also REITs that specialize in specific sectors or property types, such as healthcare REITs, which include senior living facilities.
When investing in REITs, it is important to consider the company's management, business strategy, track record, and how they generate income. Additionally, factors such as interest rate changes and demographic trends can impact the performance and viability of senior housing REITs.
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Direct Private Investment
On the operator side, you need a capable and expert management team with significant experience in senior living. For development, you need to find a partner with the talent and expertise to either convert an existing property or build a property from scratch. They must ensure the property meets the unique regulatory requirements of a specific senior living community, such as an independent-living community, assisted-living facility, or nursing home.
With a developer and operator, your role is to invest in whatever it takes to bring a product to market and begin generating cash flow. The end goal is either a successful exit or maintaining ownership and earning a percentage of its profitability—both of which can be highly lucrative.
The advantages of direct private investment include a high upside potential, a low-to-no need for operational experience in senior living, and more voice and control in strategic decisions than you would typically have in public investments. However, with higher reward comes higher risk. You will likely lack some control in everyday decision-making, and finding an experienced developer and operator isn’t easy.
Consider your network and whether you know a capable operator and developer, or someone who does. If not, research potential partners in your region, and don’t be afraid to cold call.
The total size of the senior housing and care investment property market is estimated to be between $250 billion and $270 billion. Senior housing properties aim to provide both housing and services to seniors. The three main categories of senior housing include independent living, assisted living, and skilled nursing facilities. Memory care is another specialized type of care that may be included as its own category or as a subset within assisted living.
Senior living communities allow senior citizens to live mostly independently with access to a variety of amenities, providing an alternative for individuals or couples who can no longer safely live on their own but don’t want to move into assisted living facilities. These communities provide everything from on-site health care services to meal plans to wellness programs.
By investing in broad funds that focus on senior living in general, you can turn your investment into something long-term that you can pay into throughout your life and get returns from during your investment period.
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Private Funds
Investing in private funds is a great way to enter the senior living industry. Private funds allow you to put your capital to work in senior living communities, organisations, or both. They pool capital from a group of investors to maximise spending power compared to direct private investment from a single entity.
Senior living funds are a type of private equity fund that finances the construction and operation of senior housing facilities. In exchange for your investment, you will receive a share of the business's profits via both cash flow (operating distributions) and long-term appreciation.
There are a few things to keep in mind when investing in private funds. Firstly, you need to qualify as an accredited investor by meeting certain thresholds for income or net worth. Secondly, investing in a private fund often depends on your connections as general solicitation is not allowed. Keep an eye on your network and don't be afraid to express your interest in investment opportunities in the senior living space.
Senior living funds, such as those offered by Arabella Capital, provide investors with access to high-quality properties and above-average returns. These funds specialise in senior living real estate and partner with experienced professionals in the industry. They strategically allocate funds to ensure investors get the best opportunities.
Another example is the Senior Living Fund, a private equity company that focuses on managing a diversified portfolio of healthcare real estate funds with a focus on senior housing equity and debt investments. Their investment offerings provide accredited investors with the opportunity for predictable passive above-market returns.
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Recession Resilience
Senior living investments have proven to be a strong asset class regardless of the overall economic climate. This is due to the asset class's unique position in the market and its resilience during economic downturns.
Firstly, senior living investments are underpinned by strong demographic trends. The rapid ageing of the population is fuelling demand for senior living facilities, which are already in short supply. This demand is expected to increase as the number of Americans aged 65 and older is projected to grow from 56 million in 2020 to 79.2 million by 2035, with the oldest cohort, those aged 80 and above, expected to grow by 700,000 to 800,000 individuals annually by 2030. This will create a greater demand for senior living facilities, as the rate of new construction is not keeping pace with the ageing population.
Secondly, senior living investments are needs-based investments, which are less dependent on the economic cycle. Seniors aged 65 are expected to live for an additional 20 years, increasing the demand for senior housing. During economic downturns, senior living facilities provide a more affordable and convenient option for seniors, making the industry recession-resistant. Furthermore, senior living has a history of performing well during economic downturns. For example, during the 2007 capital market collapse, senior housing was a top-performing commercial real estate sector, with returns that were higher than other commercial sectors.
Thirdly, senior living investments benefit from high occupancy rates and long waitlists. This is due to the specialised nature of senior living facilities, which are designed to meet the unique needs of seniors, including social destinations, restaurant-style dining, spacious private rooms and baths, as well as therapy and wellness services. These facilities cater to the growing demand for newer and better communities tailored to emerging retirees.
Finally, senior living investments are supported by favourable financial conditions. During economic downturns, rising interest rates can benefit older adults who hold savings in the form of certificates of deposits (CDs) or treasury bonds. Additionally, relatively high home prices can provide seniors with the equity needed to fund a move into senior housing.
In summary, senior living investments are recession-resilient due to the ageing population, the needs-based nature of the industry, high occupancy rates, and favourable financial conditions. These factors combine to create a strong asset class that is well-positioned for success in all phases of the real estate cycle.
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Frequently asked questions
The demand for senior housing is increasing due to the aging population, with the number of Americans aged 65 and above projected to rise significantly in the coming years. This creates a vast demand for senior living facilities, making it a stable and lucrative investment opportunity.
As with any investment, there are risks involved. Some factors to consider include development and operating costs, construction activity, increasing interest rates, acquisition competition, and potential changes in economic and regulatory conditions.
Senior living communities can be categorized into independent living, assisted living, and skilled nursing facilities. Independent living communities cater to seniors who require little to no assistance and offer various amenities and social programs. Assisted living facilities provide personal support services and healthcare assistance to residents who are not fully independent. Skilled nursing facilities offer 24-hour specialized medical and nursing care for chronic and short-term conditions.
There are several ways to invest in senior living funds, including Real Estate Investment Trusts (REITs), direct private investment, and investing in private funds. REITs offer ownership stakes in senior living communities through public markets and are accessible to a wide range of investors. Direct private investment involves finding an operator and a developer, where you provide capital and play a role in bringing a product to market. Investing in private funds allows you to pool capital with other investors to maximize spending power.
Investing in senior living funds offers the potential for higher returns compared to other real estate investments and tends to be more resilient during economic downturns. It also provides a long-term investment opportunity, allowing you to pay into it over an extended period. Additionally, with the growing demand for senior living options, your investment can contribute to addressing a pressing societal need.