Are nursing homes profitable businesses
Nursing real estate as a capital investment - opportunities and risks
Annette de los Santos, April 30th, 2021
What is a nursing home?
Care properties are special properties. Nursing homes are apartments that are located in retirement and nursing homes, dormitories with attached care or in mixed homes made up of a dormitory (assisted living) and a nursing home. The interested private investor can invest in one or more of such care properties and use them as a financial investment by profiting from the rental yield.
Current market situation of care properties
Due to the demographic development in Germany, the need for care facilities is increasing steadily.
It is true that the age of the elderly who move to a nursing home is also increasing. In 2010 it was 80 years on average, compared to 65 in the early 1970s. Due to the disproportionate increase in the older population compared to the younger generations, the need for nursing homes is nonetheless increasing continuously. This will intensify in the next 20 years when the generation of “baby boomers” is 70 years and older.
In addition, many older retirement homes and nursing homes do not meet today's legally prescribed standards, for example with regard to fire protection, personal protection, accessibility. In addition, due to their spatial conditions, they often cannot be converted accordingly.
Replacement buildings or new care properties must therefore be provided, which, however, many of the non-profit operators cannot finance. The communities often do not have the appropriate know-how to carry out market and location analyzes in order to determine the long-term need for care.
For these reasons, a market for private nursing home providers has developed in the recent past. The providers are property developers and project companies who, together with operators, design modern care facilities and build new care properties. After completion, these will be rented by the operators of the senior residences for at least 20 years.
Nursing home demand forecast up to 2030
According to the “Nursing Home Atlas Germany 2018” by the consulting firm Wüest Partner, almost 180,000 additional care places will be required by 2030.
However, the report also shows that needs will develop differently depending on the region. The highest absolute additional need for care places by 2030 in cities and districts is forecast (in descending order) for:
- Hanover region
- Rhein-Sieg district
- Rhein-Neckar district
In a comparison of the federal states, North Rhine-Westphalia, Bavaria and Baden-Württemberg have the highest forecast additional demand. In contrast, Mecklenburg-Western Pomerania, Saxony-Anhalt and Thuringia are predicted to have the lowest demand by 2030.
Detailed forecasts for care properties like these are subject to constant change, as more and more care properties are being built in order to avoid future bottlenecks. Nevertheless, it should be noted that as before all federal states required capacities in the near future that they cannot yet provide at this point in time. Thus, there will continue to be a certain demand and care properties can rightly be classified as a lucrative growth market for private investors.
Advantages of an investment in care properties
- Purchase price: Nursing apartments are usually purchased directly from the developer and therefore free of commission.
- Long-term and indexed rental income: The rental by the owner of the nursing home is not made to private individuals, but to the operator of the nursing home. The lease is usually concluded for a period of 20 years with an index rent (annual rent adjustment). This means that the investor does not bear any risk of loss of rent if the apartment is temporarily vacant. Investments in care apartments are largely independent of the economy due to the shortage of care properties that already exists in many regions and the forecast growth of the care market.
- Profitable sale: Future price increases for care properties are likely due to the market conditions, so that a profitable sale is likely to be possible.
- Tax advantages: The tax advantages of nursing homes correspond to those of other residential properties, i.e. depreciation on the property (two percent annually) and interest on debt financing are tax deductible. Since the apartments are furnished, the movable inventory can also be written off for tax purposes over 10 years. After the ten-year speculation period has expired, any profit from the sale is tax-free.
- Low running additional costs: Here, too, the landlord is liable for defects which, however, do not result in any financial burdens on the investor due to the property developer’s five-year warranty period.
- Low administrative effort: The administrative effort is significantly lower than for regular residential properties, since the management of the apartments is the responsibility of the operator.
Allocation right of the investor: A non-monetary advantage consists in the investor's usually contractually granted priority occupancy, i.e. he or his family members can move into the apartment themselves. Your own maintenance costs can then be offset against the rent still paid by the operator.
Dealing with your own future care needs is uncomfortable. Nevertheless, there are precautions that everyone should take, such as a health care proxy.
- Attractive return: The returns from renting and increasing the value of the nursing home are given as 4.0% - 6.0%, sometimes up to 8%.
- State funding: Certain care properties are also subsidized by the state. These are inpatient care facilities, hospices, homes for the disabled and psychiatric facilities. If the care property is vacant or the resident is insolvent, the state pays the rent, i.e. the subsidy benefits the operator and the operator has a lower risk of insolvency. However, these are care properties that hardly have individual apartments.
Risks of an investment in care properties
- Location: As with other properties, the location of the nursing home or retirement home is crucial for an advantageous investment in nursing home properties. They should be located in a catchment area of at least 25,000 inhabitants. In addition, it is important to ensure that there is actually a shortfall in the respective region. The investor should make sure that a solid needs assessment has been made and, if necessary, obtain additional information from the district office.
- Nursing home size: The size of the nursing home should enable economical business operations. Houses that are too big have a higher risk of overcapacity, houses that are too small are not profitable in the long term. Experts consider a size of 80 to 120 apartments per nursing home to be optimal.
- Developer: There are a few property developers who have experience with the special requirements for accessibility and age-appropriate construction for nursing homes. The potential investor should check relevant references from the property developer.
- Operator: There is a fundamental risk of the home operator becoming insolvent. Lately, cases of fraud have also occurred in the billing of individual care companies, so that their permission has been withdrawn. In such cases, the investor has to cope with loss of rent due to vacancies until a new operator takes over the facility under other, less favorable conditions. The investor should make sure that the home operator has long-term success in the market and operates several nursing homes. National non-profit operators with shareholders under public law are considered safer. In the case of private home operators, however, the intention to make a profit is in the foreground. They therefore enjoy a lower level of acceptance among the population.
- Change of location: Even with careful analysis, there is always the long-term risk that the location of the care property will become less attractive, e.g. due to deteriorated infrastructure or social structure.
- Return: Return forecasts are generally “nicely calculated” for all investments and are often incomplete. The potential investor should therefore carefully examine the premises and information contained in the care property or seek advice from a specialist.
- Interest rate risk: As with any property, in the case of external financing of the investment, after the fixed interest period has expired, there is also the risk that the loan will be extended at a higher interest rate. This risk is relatively high, especially given the current low interest rates.
- Maintenance: Remember that, as the owner of a nursing home, you bear the costs of maintaining the property.
A real estate investment in nursing homes or nursing apartments can make sense, especially for old-age provision. Care properties, however, are not suitable for fulfilling short-term profit maximization intentions. Before investing, opportunities and risks should be carefully weighed.
In order to build up a real estate portfolio with small amounts, crowd investing is an alternative with high returns. The investments not only earn attractive interest, the capital commitment is also shorter than when buying care apartments. The risks are also manageable for the investor.
The taxation of interest and sales income takes place in the form of 25% withholding tax. The investor's individual tax rate, which is levied on rental income and lease income and on speculative profits from sales within 10 years, is often significantly higher.
One platform that offers real estate crowdinvesting is the company BERGFÜRST, which has been operating on the market with growing success for several years.
Image Copyright: VOJTa Herout / Shutterstock.com
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