As America ages, it goes without saying that the assisted living business will be blooming for years to come. It’s no wonder we see new facilities popping up all around us – most of them doing quite well. Investment groups and private owners are buying existing homes, building out new locations, and/or expanding the facilities they already have – all to meet the 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 looks, but if you are smart and buy right it can be a wise investment. In this article, we will look at many of the questions you should be asking yourself and your advisors during the evaluation process of purchasing an existing RCFE.
Indeed, there are many trips and traps when buying an RCFE (residential care facility for the elderly). And, of course, we all know that not all RCFE’s are created equal. Still, you have to ask yourself; where do I start, what should I be looking for, and what are the major red flags? Suffice it to say, there are many factors you must 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 purchasing an RCFE, Board and Care Facility, or Assisted Living Home you’ll need guidance and a solid strategy. First things first – you need to know what you are looking for.
What Size and Type of RCFE Would You Like to Purchase?
Let’s get the terms straight, so we are all on the same page here. What are the differences between a RCFE, Assisted Living Home, Rest Home, and Board and Care Facility? Essentially, they are the same, at least as far as the State of California is concerned when it comes to licensing. All of these facilities must have the RCFE License to operate legally.
Out in the real world, most RCFEs are smaller with under 15-beds, and most are privately owned, often with the owners living in the local community. The 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 resident packages.
Licensed RCFEs can provide non-medical assistance such as eating, incontinence, dressing, personal hygiene, walking, supervision, and reminding and distributing a resident’s personal medicines as the prescription designates (self-administered). These facilities are not required to have doctors or certified nurses on their staff.
Consider why is the Owner Selling Their Facility in the First Place?
If Residential Care Facilities for the Elderly are such a good business model, then why on Earth is the owner selling? Do they have multiple facilities and want to sell their dogs, while keeping their flagship or profitable operations? Are the owners retiring themselves and don’t have heirs to take over the business, thus, just want to cash out? Is the facility rundown? Maybe owners don’t wish to invest in needed upgrades. Is the facility borderline and worried about licensing requirements and future inspections? Has the RCFE ever been licensed?
Has the facility been cited before for lapses in their mandatory compliance, is it at risk of license revocation? Have the owners been called into 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 obligations and record-keeping, it’s easy to get into the ‘digital record-keeping doghouse’ in CA, a place no RCFE wants to be. Does the facility have a good reputation with the DSS – Department of Social Services? It’s a lot of questions, but these are all good things to know before you start making any offers.
It’s also important to look at the current residents and staff and their living/work conditions. Does the facility look clean? If you were a state inspector would you pass it for health and safety? What do their records show from previous inspections? Has the facility been paying the staff properly and recording overtime in a legitimate fashion? Are all members of the staff legal US citizens or have work VISAs? Again, if everything is on the up-and-up, try and gain an understanding as to why the owner is parting ways with their investment and make sure that they are not trying to pass on their pitfall to a new unsuspecting owner.
Remember: You are Buying a Business, Not Just Real Estate
Yes, while it is true that real estate can be a good investment over time and a hedge against future inflation, buying an RCFE is more about buying a business. The real estate should be a secondary consideration. In fact, if you separate out the two, and look at the real estate as one investment and the business as the other, you’ll have a clearer picture. Can the real estate stand on its own merit as a viable investment; long-term hold, or fix and flip? Can you afford to buy and hold the real estate if the RCFE doesn’t make a profit on its own?
How will you pay for it all if you lose the residents due to the change in 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 are planning to spend on new upgrades? What is your plan, do you have what you need to execute it? What if all the residents move out? Will the sellers consider a ‘clawback’ clause in the purchase agreement in the case that happens? Will the current owners stay on board for a while ensuring a smooth transition? Are the current owners a problem, perhaps you don’t want them anywhere near the facility?
How is the neighborhood? Are the surrounding neighbors happy with the facility? Have there been issues? Will they turn-out and speak against your future plans of expansion, upgrades or filings at the local planning commission as you try to get your construction or remodeling projects approved? Is the Neighborhood itself run down, will this prevent you from attracting residents or prevent you from commanding a fair and reasonable market price for those who come to stay?
Is the RCFE Profitable?
It is also important to evaluate if the facility is currently financially stable. Consider if most of the residents are SSI residents. If so, keep in mind you will never be able to evict them, nor will you be able to raise prices much. If the facility isn’t making money now or barely scraping by, what will do when it is time to make repairs, upgrades, or comply with future regulations?
Will you need to expand the facility to improve revenue? Will you be able to renovate and add-on to the facility? Can you potentially do this out of cash flow? Speaking of cash flow, how timely are the residents with their payments? Are loved ones footing the bill, are they perpetually late with payments? Have the current facility owners been letting these late pays slide in the past? Are all the residents paying similar rates or have long-term ‘sweetheart deals’ been made for a few? Are all payments being made above board or are some residents paying ‘cash’ in off the books payments – if so this can cause havoc with proving revenue and financing your purchase.
How much work are the owners doing – do they have family members doing work, are they paid like regular employees? How is all this accounted for? Will your costs change drastically once you take over the business, as you will have to hire more staff than is currently servicing residents to offer the same level of care?
If you plan on doing substantial upgrades to the facility; what are the local building codes like, what restrictions are there on these types of facilities and what is the zoning in that specific area of the city? As you can see, most California cities have rules and building codes for Residential Care Facilities for the Elderly.
What other competition is in the area? Are new larger corporate Assisted Living Homes opening nearby with low-introductory offers? That is to say; can you compete with the ‘big boys’, the well-financed REITs with huge new facilities, an array of amenities, economies of scale, paid referral recruitment programs, and choice locations? You probably can if the business is profitable now, in full compliance, and/or you have a solid strategic plan.
Are the RCFE’s Facilities Well Maintained?
Title 22 is pretty specific when it comes to licensing of Residential Care Facilities for the Elderly (RCFE) and in 22 CCR 87303 “Physical Environment and Accommodations” it lays out the requirements for Maintenance and Operations of RCFEs. Inspections come every two years and if you aren’t in compliance, you will have a huge headache on your hands. The last thing a facility wants is to be considered ‘problematic’ by an inspector, the word gets around fast and it quickly snowball out of control. When purchasing an Assisted Living Home, Board and Care Facility, or RCFE you should look over the facility with a keen eye for detail as if you were a Title 22 Social Services Inspector. Looking through that lens, what do you see? Remember once you purchase the facility any of those problems you see will instantly become yours.
Can I Just Buy a Home and Turn It into an RCFE?
Yes, this is another option. Starting a new RCFE will require licensing, and more time to get up and running. You’ll need a comprehensive business plan and an expert consultant who has been through this process before, someone who knows the curves of the road ahead. You will need more working capital to start, but you won’t have to pay for ‘goodwill’ or a multiple of the annual gross revenue as 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 put into place a class-act compliance system. The biggest advantage is that you can build it out of your way with the most efficient and modern methodologies. Yes, it can be done. If you do it right, it might be the best option for you. Think on this, while shopping around and seeing what RCFEs are on the market.
We know that we have provided more questions than answers in this article. This was by design. Embarking on a journey to purchase an RCFE is one filled with questions that need to be answered and sometimes the hardest part is knowing what the right questions to ask are. Hopefully, this article has given you some insight into that. And if you find that you still need further guidance and/or consulting you can always reach out to our expert team to help make sure you are headed in the best possible direction. Good luck and happy shopping!
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