As America ages, it goes without saying that the assisted living business will flourish for years to come. It’s no wonder we see new installations popping up all around us, most of them working quite well. Investment groups and private owners are buying existing homes, building new locations, and/or expanding existing facilities, all to meet ever-growing demand. There is a lot to know about this business model. Buying an existing REFE and expecting a guaranteed profit is a lot harder than it sounds, but if you’re smart and buy right, it can be a good investment.
In fact, there are many pitfalls and pitfalls when it comes to purchasing an RCFE (Residential Care Facility for the Elderly). And of course we all know that not all RCFEs are the same. Still, you have to ask yourself; Where do I start, what should I look for and what are the main warning signs? Suffice it to say that there are many factors that you need to take seriously, as well as a number of pitfalls and, yes, as they say; “The devil is in the details” and when it comes to buying an RCFE, board and care facility or assisted living home, he’ll need guidance and a solid strategy. First things first: you need to know what he is looking for.
What size and type of RCFE would you like to purchase?
Let’s clear up the terms, so we’re all on the same page here. What are the differences between an RCFE, an Assisted Living Home, a Rest Home, and a Board and Care Facility? Essentially, they are the same thing, at least as far as the state of California is concerned when it comes to licensing. All these facilities must have the RCFE License.
In the real world, most RCFEs are smaller, with fewer than 15 beds, and most are privately owned, often with owners living in the local community. Larger assisted living facilities generally have corporate and investment company owners. These facilities are easily recognizable and usually come with private apartments (rooms) and different packages for residents.
Licensed RCFEs may provide non-medical assistance such as: eating, continence, dressing, personal hygiene, walking, monitoring, and remembering and dispensing a resident’s personal medications as prescribed (self-administered). These facilities are not required to have doctors or registered nurses on staff.
Why is the owner selling his premises in the first place?
If Residential Care Centers for the Elderly are such a good business model, then why the hell is the owner selling? Do you have multiple facilities and want to sell your dog while keeping your flagship or profitable operations? Are the owners retiring and don’t have heirs to take over the business, so they just want to get paid? Is the installation damaged? Owners may not want to invest in necessary upgrades. Is the facility on edge and concerned about licensing requirements and future inspections? Have you ever obtained the RCFE license?
Has the facility been previously cited for failure to comply, is it at risk of license revocation? Have owners been called to formal administrative hearings for non-compliance? Title 22 regulations are serious business, is the facility in chronic violation? How does the facility handle its compliance and recordkeeping obligations? Is it easy to get into the ‘digital record keeping doghouse’ in CA, a place RCFE doesn’t want to be? Is the facility in good standing with the DSS – Department of Social Services? You need to know before you start making any offers.
Looking over the installation, does it look clean? If you were a state inspector, would you approve it for health and safety? What do your past inspection records show? Has the facility been paying staff properly and recording overtime legitimately? Are all members of the legal staff US citizens or do they have work VISAs? Again, if everything is up, why are they selling?
Remember – you are buying a business, not just real estate
Yes, while real estate can be a good investment over time and a hedge against future inflation, buying an RCFE is buying a business. Real estate should be a secondary consideration. In fact, if you separate the two and consider real estate as one investment and business as the other, you’ll have a clearer picture. Can real estate stand on its own as a viable investment; keep long term, or fix and flip? Can you afford to buy and keep the real estate if RCFE does not make a profit on its own?
How will you pay for everything if you lose residents due to change of ownership? There will be some attrition when new owners take over, the average is 20-30% – can you deal with that, at a time when you plan to spend on new upgrades? What is your plan, do you have a strategy? What happens if all the residents move? Will sellers consider a ‘take back’ clause in the purchase agreement in case that happens? Will the current owners stay on board for a while to ensure a smooth transition? Are the current owners a problem, maybe you don’t want them near the facility?
How is the neighbourhood? Are the surrounding neighbors happy with the installation? Have there been problems? Will they attend and speak out against your future expansion plans, improvements, or filings at the local planning commission while you try to get your construction or remodeling projects approved? Is the neighborhood itself run down? Will this prevent you from attracting residents or will it prevent you from getting a fair and reasonable market price for those who come to stay?
Is the RCFE profitable?
Is this facility making money? Are most residents on SSI? If so, you will never be able to evict them, nor will you be able to raise prices very much. If the facility isn’t making money now or is barely surviving, what will you do when it’s time to make repairs, upgrades, or comply with future regulations?
Will you need to expand facilities to improve revenue? Will it be able to renovate and expand the facilities? Can you potentially do this out of cash flow? Speaking of cash flow, how punctual are residents with their payments? Are your loved ones footing the bill, perpetually behind on payments? Have current facility owners been reading these late payment slides in the past? Are all residents paying similar rates or have long-term “special offers” been made for some? Are all payments made honestly, or are some residents paying “cash” in off-the-books payments? If so, this can wreak havoc with proof of income and financing of your purchase.
How much work are the owners doing? Do you have relatives working? Are they paid as regular employees? How is all this accounted for? Will your costs change dramatically once you take over the business, as you will have to hire more staff than you currently serve residents to provide the same level of care?
If you plan to make substantial improvements to the facility; What are the local building codes like, what restrictions are there for this type of facility, and what is the zoning in that specific area of the city? As you can see, most cities in California have rules and building codes for Residential Care Facilities for the Elderly.
What other competition is there in the area? Are new larger Corporate Assisted Living Homes opening nearby with low introductory offers? Namely; Can you compete with the ‘big’, well-funded REITs with huge new facilities, a variety of services, economies of scale, paid referral recruitment programs, and select locations? You probably can if the business is profitable now, in full compliance, and/or you have a solid strategic plan.
Are the RCFE facilities well maintained?
Title 22 is quite specific when it comes to licensing Residential Care Facilities for the Elderly (RCFE) and at 22 CCR 87303 “Physical Environment and Accommodations” it sets out the requirements for RCFE Maintenance and Operations. Inspections are done every two years and God help you if you don’t comply. The last thing a facility wants is to be deemed ‘problematic’ by an inspector, word spreads fast and it can all go downhill from there. When purchasing an assisted living home, board and care facility, or RCFE, you need to examine the facility with attention to detail, like a Title 22 social services inspector. Looking through that lens, what do you see? ? Remember that once you purchase the install, any of those issues you see are instantly yours.
Can I just buy a house and convert it to an RCFE?
Yes, this is another option. Starting a new RCFE will require a license and more time to get up and running. You’ll need a comprehensive business plan and an expert consultant who’s been through this process before, someone who knows the twists and turns of the road ahead. You’ll need more working capital to get started, but you won’t have to pay for “goodwill” or a multiple of annual gross receipts like you would if you were buying an existing RCFE. You will need to consider the costs and time associated with licensing, hiring, marketing and training, and establishing a class-compliant system of compliance. The biggest advantage is that you can build it your way with the most efficient and modern methodologies. It can be done. If you do it right, it could be the best option for you. Think about this while you shop and see what RCFE is on the market.