Investing In Residential Assisted Living

In the United States today, there are about 70 million Baby Boomers, and 10,000 of them reach retirement age every day. With these numbers alone, it’s easy to see that there will be a huge upswing in the need for residential assisted living (RAL) spaces for the next couple of decades at least. RAL offers elderly people the opportunity to live relatively independently but to still receive support and care services.

Investing in residential assisted living holds great appeal for many rental property owners. And why shouldn’t it? There is huge income potential, even if you own only a small building, such as a single-family residence. The average RAL resident pays over $4,000 a month for a private room. A house with six private rooms can potentially gross $300,000 a year.

But of course, even though the income potential is huge, so is the potential liability. Your residents are elderly individuals who may have debilitating medical conditions and/or dementia. You also have employees, who might turn out to be negligent or have background issues you don’t know about. The possibility of lawsuits is extremely high. I recall one case, for example, where a resident wandered off the property, fell, hit her head, and died from a hematoma. There was a judgment of about $2 million for negligence and wrongful death.

That means you want to structure your RAL business(es) to protect yourself from catastrophic loss. There are two main entities involved in running a RAL. One is the company that operates the RAL services, the other is the company that owns the property. You might own one entity or the other, or you might own both.

Let’s assume you own both. The number one mistake I see people make in this instance is that they own the property within their operating business. If the business were sued, the plaintiff would take the property in their recovery, along with whatever insurance payout there might be. For that reason, you want to make sure that if you own the property, you hold it in that basic, anonymous Wyoming LLC structure I’ve talked about many times in my videos, books, and blogs. That way, people don’t know you own it. Set up a unique LLC for each property. And then enter into a lease agreement with a separate entity you create to handle the management side. That could be an S-corp or a C-corp, depending on your tax-planning objectives.

So, the operating business with which all the residents and employees deal—the brand-name corporation that advertises, hires staff, provides services, etc.—leases the property from your LLC. And then if anyone sues, it’s the management corporation that takes the hit. And that corporation has no real property assets. You might lose the business, but you won’t lose your property. You can always start another business in its place.

If you don’t own the property but provide only the residential services, you have a different set of vulnerabilities. Let’s say, for example, you’re managing four properties. Three are performing well financially, the other one isn’t. You try to break the lease on the underperforming one, and the property owners sue you for breach of lease. They win the suit and take all the profits you’re making on your three other properties. Obviously, you don’t want this to happen.

What you might want to do in this case is set up your main management corporation, and then create a “blocker” LLC. That blocker LLC leases the units from the property owner, and then it turns around and subleases the property back to the management corporation. That way, if there’s ever a lawsuit, it will go after the blocker LLC, which has no assets to speak of, not the actual corporation. Thus, you preserve the cash flow and status of the corporation.

Investing in residential assisted living is a great idea in this era of growing need for elderly housing. Just make sure you’re using the right entities to protect yourself.