3 Critical Risks to Address Before Starting an Assisted Living Home

3 Critical Risks to Address Before Starting an Assisted Living Home

When I mentioned plans to open an assisted living home a few years ago, the feedback was positive.

Family and friends knew I always wanted to own my own business. They, like me, also absorbed the media message about the “graying of America.” Opening an assisted living home to serve baby boomers, who were then turning 65, seemed like a can’t-lose proposition.

Unfortunately, no one in my circle asked about a business plan or financing. If they had, it’s likely my head would have exploded. Because I couldn’t fathom my assisted living home failing. It didn’t occur to me that it could.

So, what is assisted living?

An assisted living home is a residence designed for older adults who need help with necessary activities (bathing, eating, etc.). It is the midpoint between independent living communities (where healthy seniors live) and nursing homes (for the frailest seniors who require 24/7 care). The typical assisted living resident is a woman, about 85, who stays for two years, according to the Assisted Living Federation of America.

Assisted living homes operate largely free of federal regulation. Compliance and paperwork are state-specific; permits are easy to get.

In Washington, the state where I live, small assisted living homes are known as adult family homes. In other states, they’re called care homes, adult care homes, residential care facilities for the elderly, or some variation of terms.

Assisted living homes range in size from four bedrooms to large scale developments containing hundreds of double-occupancy bedrooms, referred to as communities.

The divide between a small home and a massive building is about more than size; it’s a completely different business model. When doing research, it’s critical to pull data for the specific type of facility you plan to open. Otherwise, you’ll draw the wrong conclusions, which could lead to a financial disaster.

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Wall Street versus Main Street

If you google “assisted living,” you’ll see ads for large scale companies and referral services. Most of these companies are public companies, REITS (Real Estate Investment Trusts), or owned by hedge funds. In other words, they’ve got deep pockets.

The industry has been consolidating in recent years, creating massive new companies, where “assisted living” is just another form of real estate ownership. In fact, as these companies form, merge, or sell, the first action is usually to separate or spin off the service aspect of the business from the underlying real estate. Looking at the financials for this type of juggernaut is complicated and requires a CPA’s expertise!

In 2012, when I was most serious about buying an assisted living home, large firms reported occupancy levels between 89 and 92 percent. I assumed these statistics applied to all assisted living facilities, making my business dream even more hypnotic. With resident fees ranging from $3K-5K per month, the cash register was dinging in my head.

Gumshoe investigating

Thankfully, I held off making an investment decision before doing more research. I moved cross country in late 2012 and immediately began talking to assisted living home owners and managers.

The first person I visited was the manager of a large, family-owned facility. He looked exhausted. His forty-year-old facility was having trouble attracting residents. The problem was that historically low-interest rates were fueling an assisted living building boom. The new properties were sleek, modern, and amenity-rigged. He simply couldn’t beat their value proposition.

While his experience gave me a macro view of the large facility landscape, it wasn’t particularly helpful for the type of business I envisioned. So, I began calling smaller homes, and some owners were kind enough to speak with me.

Risks of starting an assisted living business

It became clear that I hadn’t grasped three major risks of the business. Any one (or three) were capable of blowing a hole in my business’s profitability.

1. Labor costs

The single biggest cost for an assisted living home is labor. Were I to open a home, I would need to pay caretakers around the clock or be the overnight caretaker myself. In the early days, I’d be chained to the business.

Many assisted living homes are family-run businesses. That means mom, dad, adult children, and extended family members alternate as caretakers. This arrangement minimizes wages paid, including overtime.

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Other homes make use of volunteer labor. Volunteers provide services like entertainment for the residents, making caretaking easier. High school and college students can earn course credit by volunteering at an assisted living home.

2. Limited pool of prospects

The monthly cost of an assisted living home—$3K and up—rules out the majority of the senior population as prospects. Most seniors cannot afford anything more than a short stay in an assisted living home.

Unlike nursing homes, assisted living homes generally do not accept Medicaid or other government funding. They pay cash from their savings or sell their house to afford monthly payments. This leads to the third risk…

3. Fierce competition

A small pool of prospects means intense competition for every resident at an assisted living home. Typically, the family of a resident looks at multiple homes before making a decision. That means always selling and always being “on.”

Many assisted living homeowners are nurses or nursing assistants. They have a deep reverence for the elderly and take excellent care of them. However, these same compassionate people sometimes feel dirty or unethical trying to close customers.

To keep their pipeline full, assisted living homeowners often rely on referral agencies, which charge a fee for every resident who moves in. Residential turnover is unpredictable and often high, regardless of satisfaction level. This means an owner may pay multiple fees for the same bedroom in one year. Owners come to resent these agencies.

The up-close interviews scared me, so I never opened my own assisted living home. But I did work closely with other homeowners throughout the U.S. in 2013 and 2014 as a copywriter and marketing consultant.

Tips for assisted living business success

Create a business plan

Put it under scrutiny and revise as needed. Talking to assisted living owners, I’ve found some who’ve relied on guesswork and optimistic projections instead of clear metrics.

Here are useful business planning resources:

Think location

Seniors don’t normally travel very far when searching for an assisted living home. It’s usually close to where they last resided or where one of their children lives.

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Before opening a home, look at the demographic profile of the town, city, and county:

  • Income and net worth
  • Age
  • Population growth (or loss)
  • Number of other assisted living homes

Much of this data is available online. Read How to Do Market Research and Market Research Resources for more on researching the market you plan to enter.

Keep impeccable records

Running an assisted living home means having to file paperwork. The penalties for getting behind are severe. Even minor infractions will tarnish your home’s reputation.

In many states, even minor infractions will put your home in the state’s digital doghouse. Your home will be dropped from consideration. Better to never make it onto the penalty list in the first place.

Provide premium service

Assisted living homeowners who offer premium service weather lean months better than those who don’t. The profit margin on premium service provides a cushion and differentiates the home.

Get comfortable selling

Selling something as expensive as assisted living means understanding the customer journey. Structure your marketing efforts to provide the prospect incentive to keep going. Selling starts with little things like a cheerful voice answering the phone.

Eighty percent of small assisted living homes close within five years. That’s about the same failure rate for small businesses in any industry.

No doubt, senior care is hard work. But when you understand the three biggest risks in opening an assisted living home, you’ll be in a much better position to handle them, should you go ahead.

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