Investors looking to benefit from the impending surge in demand for assisted living facilities due to the massive number of Baby Boomers retiring in the next five years have several options for investing in this space.

Assisted living facilities (ALFs) provide live-in care in a residential setting for those who require ongoing physical or medical attention and need assistance with some of the routine daily activities such as using the bathroom, getting dressed, bathing, taking medication, and assistance with meals.

Along with the surge in the aging population, we can also expect a concurrent surge in the incidence of Alzheimer’s and dementia – making memory care a vital component in the assisted living space.

With 24-hour on-site care by a staff of licensed skilled nurses and medical professionals, ALFs offer peace of mind to residents and their loved ones while providing a comfortable residential setting.

Because ALFs can vary by the number of beds, services offered, location, amenities, etc., the options for investing in this space by dollar amount are endless.

What Are Ways For Investors To Get In On The Assisted Living Space?

There are three main ways to invest in assisted living – one option being direct investing with the other two being indirect, involving public and private investment vehicles.

Direct Investing –

Direct investing involves the direct ownership and operation of an ALF. Whether developing a facility from the ground up, converting an existing property, or acquiring an operating facility, the capital requirements for direct investments are much higher than indirect options and for the novice, the learning curve can be steep.

The obvious advantage of direct investment is the retention by the owner of all profits and tax benefits. This, however, has to be weighed against the capital and time commitments required – not to mention all the legal hoops you need to jump over to obtain the necessary licenses and certifications – to operate a facility.

One of the big disadvantages of direct investment is because of the high capital cost required to acquire and operate a facility, owners are limited in the number of facilities they are able to invest in. This usually means a portfolio consisting of no more than one or two units and typically in one geographic location.

Because of the general illiquidity of real estate, this limits diversification and exposes owners to potential downturns. Because of illiquidity, liquidating assets to meet financial obligations in a downturn can be challenging with direct investments.

REITs –

By far, the most popular form of indirect investing in ALFs in the public markets is through REITs. The advantage of REITs is because shares of REITs are publicly traded, you can buy as little as one share. Stocks also offer liquidity that private market alternatives don’t.

On the flip side, because REITs are publicly traded, they are also vulnerable to stock market volatility. And with no hard asset backing public stocks, you can conceivably lose your entire investment if the REIT tanks.

Because of the 90% rule requiring REITs to distribute at least 90% of its taxable income to shareholders annually in the form of dividends, investors assume that the REITs have investors in their best interest. However, if you read the fine print, the 90% rule says that the REIT has to distribute 90% of “taxable income” not 90% of profits.

Therein lies one of the major downsides of REITs. That taxable income can be eaten away by management fees and salaries. Because management is typically compensated based on assets under management instead of performance, this presents a conflict of interest.

When management fees and salaries are directly tied to assets under management, management becomes less concerned with the performance of the REIT and more concerned with asset accumulation (aka “empire building”) – in other words, attracting investors and growing the size of the assets under management.

Management becomes priority #1 instead of investor ROI as they seek to maximize the size of the portfolios under management rather than the performance of the portfolio assets.

Passive Investment –

A passive investment in the form of a partnership or limited liability company interest in a private company or private equity fund that invests in ALFs offers investor benefits not available through the other two forms of investment.

Although private investments are illiquid – with minimum lockup periods of five years or more – they offer a shield from market volatility REITs can’t offer. And because of the low capital requirements compared to direct investments, investors are able to invest in a variety of funds across several geographic locations to diversify risk.

Although not subject to the same disclosure requirements imposed on public companies, private companies offer greater transparency in the form of access to management and a more open due diligence process since the managers are in direct contact with potential investors at every stage of the investment life cycle.

Because of private company transparency, investors are able to review management track, record, experience, and expertise to make sure their investment objectives and strategies align.

Instead of going through the steep learning curve of acquiring and operating an AFL themselves, investors in the private space can rely on the experience of experts who have a track record of expertise.

Investing in the assisted living space offers investors the opportunity to take part in a lucrative commercial real estate segment with rising demand projected to be sustained for many years to come.

For investors looking to invest in this segment, several options are available in both the public and private markets.

Which one is right for you will depend on your capital, investment objections, risk tolerance, and time constraints.