Have you ever thought about assisted living homes, whether it’s for you, your loved ones, or as a real estate investment? If you’re thinking about becoming a landlord, consider the residential assisted living marketplace as a great place to find potential tenants. Today, Toby Mathis of Anderson Business Advisors talks to Vern from A Better Way Realty, which invests in assisted living real estate. Vern shares how he helps buy, fix, and get assisted living homes ready for operators.
Highlights/Topics:
- Who puts up the money? Investors invest in A Better Way Realty funds, and their money is deployed into assisted living homes
- Do you lease it to an operator? What’s the typical lease term? Usually, a five-year lease
- Do operators have to keep paying Vern as their landlord for five years? After three years, operators are given the option to buy the property
- How is the purchase price calculated? The purchase price is agreed on ahead of time
- Have any operators purchased a property? Two operators exercised the purchase option in the last 10 years
- How are the operators doing? Assisted living is a tough business; operators that understand the business, work at it, and can grow it
- What’s the typical age range of those in assisted living? Silver Tsunami (i.e., people over 65 in residential assisted living; the average age is 82 years old)
- What about the ages of those in adult care homes? As young as 18 and up to 60 years old on average, including sober living, medical illness, and/or autistic clients
- How do you identify properties? Assisted living works best with space for either a 10- or 16-bed home and about 3,500 sq. feet, which can be hard to find in certain locations
- Your model is different by running a fund. How does somebody become a residential assisted living investor or put money in, if interested? Passive investors can get into the fund and management is taken care of; operators make sure everything works, and investors are paid
- Are you doing a share? Carve-out? How are you running that? Usually, it’s an 8-10% annual return by the monthly payout
- What’s been your favorite project that you’ve been involved in? Four-pack of houses that helped operator more than double their business
- Where do you find your operators? Do they find you, or are you looking for them? Both
- How does somebody become an operator? Volunteer in an assisted living home; a unique type of caregiving that requires compassion and business sense
- What’s the worst part? If you fail and lose money, worse than that, you displace tenants
- Do you have projects that you’re waiting on to be completed? The newest fund has been open a few months and has a fair amount of cash lined up
- What’s the average amount that tenants pay? Depends on home, location, and Medicaid vs. private payments
Resources
Denver Association of Assisted Living Residences
Residential Assisted Living (RAL) National Association
Anderson Advisors Tax and Asset Protection Event
Full Episode Transcript
Toby: Hey, guys. This is Toby Mathis with the Anderson Business Advisors podcast. Today I have a great guest, Vern Harris, who does pretty much what a lot of you guys might be thinking of doing. I’m not going to ruin it. Vern, how are you doing?
Vern: I’m doing great today. How about yourself?
Toby: I’m doing great. Hey, tell us and tell everybody out there exactly what you do.
Vern: We invest in assisted living homes. A lot of people have heard of the assisted living, it’s a great niche to be in. We have a very specific part of that niche that we deal with and it’s the real estate only. What we do is we buy houses, get them fixed up and ready for operators, and then do a triple net lease to the operator.
Toby: That’s perfect. Whenever you’re looking at assisted living, obviously, people think of immediately having to run a house and doing all that, you’re taking that off their plate and saying hey, just be the landlord.
Vern: Absolutely, right.
Toby: How did you go about this? How did you end up doing that?
Vern: I’m at A Better Way Realty and they’ve been doing this for about 10 years. I got involved with assisted living about three and a half years ago. When I met these guys, I knew it was a perfect fit for what I was doing. The way they got into it is they had a flipper that they were doing hard money loans to. He came to them and said, “Hey, I’d like to do these assisted living homes.” They loaded up the money for it and he was the operator in that scenario. It worked out pretty well so they expanded upon it. At this point in time, we own 14 homes that we’re doing this with and we have the 15th closing on Monday.
Toby: Wow. That’s you or A Better Way, you and your spouse, or what is it?
Vern: It’s A Better Way Realty. We have funds that we invest in these. Our investors invest into our funds and we deploy their money into these assisted living homes.
Toby: Very cool. Wow, good for you guys. You’re actually leasing it to an operator, what’s the typical term of that lease?
Vern: Usually, it’s a five-year lease. We fixed their lease rate four or five years and we give them an option to buy it in three years.
Toby: Oh, wow, you’re actually coming in and saying to the operator, look, if this is a success, you don’t have to keep paying us as your landlord for five years, but after three years, you’re giving them the option to buy. How do you calculate the purchase price? Is it something you guys agree ahead of time or is it something that you guys come up with at a time?
Vern: We agree ahead of time. When we do the deal, we set that price. Our lease is based upon that purchase price. They know going in that they’ve got this option for three to five years, they can exercise it, and it’s X dollars. Their lease is set for the next five years as well. It gives them a chance to really concentrate on growing and making their business better.
Toby: Have you had anybody exercise that option and actually purchase?
Vern: We’ve had two of our operators exercise it in the last 10 years.
Toby: How are the operators doing? Is this an area that people should be looking at? That’s a loaded question, by the way, Vern.
Vern: Yeah, it is. Assisted living is a tough business like any business. There is no such thing as an easy business. It’s a tough business but an operator that is working at it, working on it, understands the business, and when they grow it, then it really starts to make sense. If you’ve got three of these houses, they’re going to be doing well. If you’ve got one house, it’s tough, you’re going to be working in it. When you get two, three, or four of these things, you’re working on it, you have people working in it.
Toby: That makes sense. If you like the golden cage, then you work in your business. If you want to enjoy life, you work on it.
Hey, you and I spoke about this before but I’m a landlord as well and I found a niche in a particular city doing assisted living, finding operators that did a specific type of assisted living. I want to ask you a very simple question because a lot of folks think of assisted living as only older people. Is that your tenant? Is it just operators that go for the older crowd or are there other options out there?
Vern: There are other options. We’ve got clients that do the sober living, we’ve got clients that do medical illness. I spoke with somebody last night who wants to open a house specifically for autism.
Toby: That’s what I do, by the way. That’s exactly what it is, it’s adult autistic individuals. It’s basically they have a den mother that lives in a unit in the same home.
Vern: That’s a terrific model. Then traumatic brain injury is another niche that’s out there as well.
Toby: Yeah. A lot of times, there are people saying, “Hey, the silver tsunami, we’re living really long,” there are a lot of folks that are over 65 in residential assisted living. What’s the typical age range for the older crowd? Do you know all those numbers?
Vern: It’s early 80s, 82 is probably the average age.
Toby: Yeah. That’s exactly what I’ve heard. Now when you’re doing the adult care homes—and it sounds like you have experience in both of these—are we talking about folks that are older or are we talking about folks that might be 23 to 33? What are we looking at?
Vern: Yeah. If we’re looking at mental illness, we’ve seen them as young as 18, 18 to 60 maybe is where they fall. I would say the average age that I’ve seen is mid-40s, somewhere on there if you were to average it out. They’re going to be in there for quite some time. As long as they take their meds, they’re going to be just fine.
Toby: They just have somebody there making sure they eat, get up, and if they’re going to work, and just watching over.
Vern: Exactly. They cook for them, they clean the place, they give them their medicines. That’s pretty much the workload of your caregiver in a scenario like that.
Toby: How do you identify properties? What’s your sweet spot?
Vern: The assisted-living works best at either a 10-bed or a 16-bed. Ten-beds is probably going to be a big ranch that you can convert the garage, maybe convert an office. If you’ve got 3, 4, or 5 bedrooms upstairs, a 3-car garage, and maybe an office, you could probably get 10 beds out of something like that. It’s going to be a 3000, 3500 square-foot house to start with as a ranch. Those can be hard to find depending on where you’re at.
Here in Denver, the house starts at about $800,000 to find a big ranch like that, but other parts of the country, they’re pretty commonplace. That’s what we look at to start with. Something that we can maybe add on to if it’s got a little bit of extra lot space, then we look for that.
We just did a deal recently, it was actually one of the existing assisted living that had seven bedrooms on a double lot. We’re adding another eight bedrooms as an addition to that house with […] in between. That’s going to have 15 bedrooms and be licensed for 16. That’s going to be a really nice house when we’re completed with that.
Toby: Your model is different. You’re actually running a little bit of a fund. If somebody wants to invest, they just put money in, is that right?
Vern: Right. If somebody wants to be a passive investor, then they can get into our fund and we take care of all the management. We find the operators, we make sure everything works, and just pay our investors.
Toby: What does that typically look like? Are you doing a share? Are you doing a carve-out? How are you running that?
Vern: Normally, it’s a return. We try to get anywhere from 8% to 10% on an annual basis. We payout by monthly. It averages 10% but we always say that 8% to 10% because things happen. We had a situation a year or plus ago where an operator that had four properties, she didn’t make it so we had to take those properties back and put a new operator in. It took about six months to get it stabilized but it’s producing again and we’re back to 10%.
Toby: What’s your favorite project to date that you’ve actually been involved in?
Vern: That’s a good question. I can almost say that four-pack was my favorite because it was four houses at once. I found an operator of three houses already. I was able to help him more than double his business. They’re doing a fantastic job with it and just really making some good money off of that business.
For me, to help somebody do that expansion to their business is very rewarding. On the flip side, hey, there’s a 50-plus beds that we’re able to fill and help people find a nice home as well. That’s my warm fuzzy spot with that particular deal.
Toby: Where do you find your operators? Do they find you or are you actually out looking for operators?
Vern: Both. I run a meetup group here in Denver that is specific to the assisted-living.
Toby: You have to plug it, what is it?
Vern: It is Denver Association of Assisted Living Residences. Just recently, we became the Colorado chapter of the national group that Gene Guarino runs which is called the RAL National Association.
Toby: Yeah. Gene is pretty fun. I’ve known him for a long time.
Vern: Yeah, absolutely. I’ve been running this group for about three and a half years. Actually, I started it right after I went to Gene’s training and felt like there was a need for something like that out in our area. Because of building that network, I had people calling me every week, either looking to buy or sell. It’s really been a good way to connect with this community.
Toby: If somebody was looking to become an operator, what paths would you give them? An operator, by the way, just in case folks don’t know, that’s somebody who actually runs the house. An operator is usually a company, we recommend it’d be a company that leases the house from somebody else. Sometimes you own the house and you lease it to your own operating entity, but at the end of the day, it’s somebody who’s actually dealing with the residents of the home. That’s the person running it.
Vern: When somebody comes to me and says I want to be an operator, usually, the first thing I recommend is, “Why don’t you go spend a few weekends in a home volunteering and see what […] all about.
Toby: That’s good advice.
Vern: Because it’s a very unique type of business and it’s caregiving. All the operators that I know, true operators have hearts of gold. It really takes that type of compassionate personality to be a very good operator because we’re dealing with people’s grandmothers. If they can go through that, come out of that, and still want to do this business, then that’s great.
The other thing we look for is do they have a good business sense. I’ve had many operators come to me wanting to use our program but they don’t have any business sense. That’s dangerous. I always recommend that they team up with somebody who’s operated a business in the past and understands what business is all about. Just being a technician is not enough to be successful at one of these, you really have to have that business background as well.
Just the opposite, I have business people come to me they say, “We want to do this,” and I say, “You need to find an operator that you can team up with, someone who understands the passionate caregiving part of this because you need both of those to be successful in this business. We don’t want to see anybody fail because if you fail, I’ve seen many hundreds of thousands of dollars lost from people that failed, but worse than that, you are displacing 10 grandmothers.” That’s the worst part, money could be replaced but when you’re starting to mess with people’s lives, that’s tough. We want to make sure that we set people up to succeed.
Toby: Yeah, absolutely. I think you just put it really well because I’ve seen that as well. If you have a call to service, be an operator. If you don’t, find somebody who does. There are other sides to the business. We always say there are three, there’s owning the real estate, there’s being the investor into the real estate, and then there are the operators. You could be an investor and an operator too, but again, that’s finding someone to team up with.
But it sounds like you’re just looking for investors to invest in real estate, or you have your fund, you’re going and you’re already matching these folks together. How much bandwidth do you have as far as bringing folks in? Do you have projects that you’re waiting on completing? Is this something where you say, hey, if somebody comes in and invest, then we go get another property. What’s the way that you operate?
Vern: Our newest fund has only been open for a few months and we do have a fair amount of cash lined up on the sidelines today for that. We’re looking for more deals, we’re about to really take this program nationally. I have a lot of deals going on here in the Denver Metro Colorado market but we want to be cautious with this because we don’t just want to throw out the money, we’ve got to make sure it’s going to work out right. We’re taking it nationally, actually next week, we’re going to be at the national conference.
Toby: I’ll see you there.
Vern: That will give us a lot more opportunities so that we can deploy our investor’s funds. It will allow us to be a little bit choosier about where we want to deploy it, therefore we can raise our success level. We’ve had good success in the last few years with that one exception of the four that dropped out. Everybody else is doing very well right now. We’re pretty good about betting our operators and making sure that we’re going to set them up for success.
Toby: If there was one thing that you saw as a killer when somebody gets in and you’re like oh, man, go do something else, what’s the one thing that makes your hair stand on end where you just don’t want to work with people?
Vern: I don’t want to say it’s just an investment mentality but I think I always get a little concerned when I see just that investment mentality. Because again, if you don’t have the caregiving heart for this thing, you’re probably not going to succeed. I think that when we had a failure, it was an investment mentality, not necessarily how are we going to take care of all these people mentality, it just didn’t work out. That always gets me concerned.
If I see an operator who’s a caregiver, it’s easy to find an investor for them. It’s harder to find for an investor or somebody who has the other side of it. If you can, it is both sides of that thing and if they don’t have the full package, it’s concerning.
Toby: If somebody is an operator in the Denver area, is this something where you’d want them to contact you and say hey, I’m an operator, I’m just looking for properties. Maybe they have two or three and they just need to grow it a little bit, is that something that you’d invite?
Vern: That’s our best client because they’re already successful, they already get it. I had a meeting with a gentleman today who has three of these things and we met the other day at a property. He’s wanting to double his number. I can bring him in, put him into three more of these things, and help him double it.
We have confidence in a guy like that because he’s already doing it. He already knows how to be successful at it. He’s been doing it for a number of years. We love those people. We’re helping them double their business, the odds that they’re going to succeed are much higher than somebody starting out from scratch.
Toby: What’s the average amount you see the tenants paying? Are you deep into that side of it or is it just you’re just doing the […]?
Vern: It varies on the house. We see some houses that are like an MI is going to be Medicaid paid but an MI doesn’t require a lot of staffing burden. Medicaid is paying about $2700 a month for that. A 10-bed MI is going to make about $27,000 a month and their staffing burden is pretty low, probably into $12,000. Their total expenses are probably about $18,000. There is some room in that to make some money.
Then if you go on to private pay, private pay is going to be about $4500 for a level-two house. Your operating expenses, they’re going to be $22,000 to $25,000 a month. Those things are going to make some money, they have a lot more vacancy so you get a bigger, maybe a 10% vacancy in that deal. They’re still making $10,000 to $15,000 a month on […] operation.
Toby: Yeah, that’s about the numbers that we see too. Everything that you’re saying is right online. When you’re leasing to this, is it above-market rents? It’s hard to find these homes so if you’re the landlord, do you have a little bit of control there?
Vern: Yes, it is above market. We basically charge 10% on the whole deal. We’ll buy a house, we’ll put in the money to fix it up, or if it’s an existing one and it needs to be freshened up, we put in an extra $150,000 frequently on the build-out that we’re doing. We’re putting in $700,000 for the addition. We’ve got a lot of investment in this thing and we just want to make sure that the numbers work at the end of the day, that it’s still worth it to them.
We don’t want them working their tails off for $40,000 a year, they need to be making enough money that there’s an incentive to do this, it makes sense. As long as it makes sense for them, it makes sense for us that we can pay our investors the returns that we would like to return. We’re not greedy, we just want to get the deal done and make sure it works for everybody.
Toby: That’s perfect. We’re going to put all your contact data out there, Vern, so that they can get a hold of you if they want. I’m going to see you at the National Convention, it’s going to be exciting to see a lot of folks that are in the assisted living business.
Would you encourage anybody that’s thinking about becoming a landlord to look at the assisted living marketplace as being a great place to potentially find good tenants?
Vern: Oh, yeah, the tenants are going to be long-term, there’s a big need for this. The more homes that we get out there, the more we’re going to fill that need. It’s like leasing to a business is really what it is. Compared with commercial and you go have a strip mall or a pad site for a restaurant, you own that piece of property, and you have a business that’s leasing it, that’s really how we look at these homes. Even though they’re residential homes, they are special-purpose and we just look at them like another piece of investment property that we have a business tenant in.
Toby: I really appreciate you coming on and sharing with us. Any last comments or any ideas that we didn’t hit that you want to throw out there?
Vern: Oh, I don’t know, that’s a good question. There’s just so much to it that it’d be hard to put in one paragraph.
Toby: I can throw one at you, join a meetup group.
Vern: Oh, yeah. There you go.
Toby: If you’re in the Denver area, come out to Vern’s meetup group, because here’s the thing, you’re never going to know it all and there are not enough professionals out there that are in this realm. It’s really difficult to find professionals, attorneys, accountants that have actually dealt with assisted living because there are so few of it. Most of them are the big boxes but there’s a huge need and so comes down to it. It’s the guys like Vern that are invaluable, his group is invaluable, surround yourself with these people. If this is something that’s of interest to you, even if you’re going to be a landlord, find people like Vern.
You do the meetup group, how often do you guys do your meetup?
Vern: We do it the last Wednesday of every month. Actually, it was last night that we had our meeting and we bring in a presenter that talks about something different every month. It’s a lot of networking and a little bit of learning. It’s just a great place to rub elbows with other people in the business and expand.
Toby: These are all over the country, I know it sounds like you’re going to expand nationally, but these meetup groups are pretty much all over the place and it’s just finding one.
Vern: I think that right now, we’re unique. From what we’ve seen, there are maybe two or three in the country that is doing what I’m doing specifically. If somebody’s interested in another state to do this, there’s an opportunity there that they could do what we’re doing here and duplicate that.
I would say get involved with the Residential Assisted Living National Association because the more people we get into that, the stronger this industry is going to be. It’s really important that we get more people doing what I’m doing and what they’re doing, collaborate together, and make this a little bit better industry.
Toby: Fill the need, make a little money doing it, that sounds like a pretty good idea. God knows we need it. Hey, Vern, thanks for coming on. It could be a little longer than you probably anticipated but I really appreciate you coming on and sharing. Again, I’ll see you at the National Convention, and hopefully, there are some folks out there listening that can make use of this, maybe reach out to you, maybe they’re popping up some other chapters elsewhere.
Vern: Thanks for having me, Toby. I’ll see you next week.
Toby: You too.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.
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