The Risks and Rewards of Care Home Investments

care home investment

All around the world the median age of populations is increasing. In more developed and affluent countries such as the US, western Europe, Japan and South Korea the numbers of elderly residents and retirees living longer has increased rapidly and this trend shows no sign of reversing.

This steady and continuous growth in the number of elderly people living in the UK is presenting a few social problems. One of those problems is that if there are less people of a working age than retirees then there will be less people to generate the income tax to cover the welfare and cost of caring for the elderly.

Another figure to note is that in the UK only 5% of people will retire financially independent and, according to Age UK, 16% of retirees live in poverty with a household income, after housing costs, of less than 60% of the average household income http://www.ageuk.org.uk/professional-resources-home/policy/money-matters/poverty-and-inequality/.

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The Risks and Rewards of Care Home Investments

Ever since the 1980’s the percentage of pensioners to the rest of the population has been increasing steadily. Currently, the UK population is made up of over 17% of people aged over 65. The Office for National Statistics published the predicted figures for the UK’s ageing population, showing an estimated increase of 23.6% by the year 2035, from 17.8% in 2015.

The result of this is that there is a huge mismatch in the current ability of the care industry to deliver services to the elderly, in comparison to what will be required in 5 – 10 years from now. With the recent years of austerity having slashed public investment the shortfall is going to be made up by the private sector and this process is already well underway.

Care home investments by both private and institutional investors have risen sharply in recent years driven by the significant under-supply of care home beds and the associated high rental yields, high occupancy rates and capital appreciation that these investments deliver.

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The Benefits Of Care Home Investments

Switched-on investors who are looking to build or diversify their portfolios, or want a steady rental income to save for retirement, have jumped on this gap in the market and are using the care home asset class to add profitable properties to their property portfolios.

Care home investments are high yielding with a net return of up to 10% per annum realistic. This means that with an investment worth £90,000, you can enjoy an income of £9,000 a year. The threshold for entry is relatively low, costing you as little as £65,000 to get into this lucrative and growing market.

Care homes are also a hands-free investment, which means that the unit you buy in the care home will be fully-managed by the care home operator. They will be in charge of the care of the patient living in the care home, as well as the maintenance of the unit itself.

As well as traditional care homes for those seniors with medical needs, luxury care home investments are also becoming more popular. These luxury suites are a particularly valuable investment because they attract higher-paying residents, resulting in higher weekly rentals for you as the investor.

Luxury care homes are great for elderly citizens who are looking to downsize their accommodation from the family home, but often it is the social aspect as much as the financial considerations that prompt the move, as many seniors wish to live in a community environment. It gives the residents a good amount of independence as they can attend social events and go on walks around the grounds. In addition, there is also the care available, where trained and qualified staff help residents with whatever needs they may have.

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Why Are Care Homes A Good Investment?

Financial Incentives

Downsizing your property and distributing your wealth to make sure that your family gets as much of the equity as possible is becoming increasingly popular. One possible future benefit to care home investments that is not often discussed is that the investor has the option of living in the unit themselves at some point. Investors can enjoy the rental income the investment generates until they decide to either sell the unit or indeed move in themselves. This is of course simply an option and even if the investor doesn’t decide to move in during their retirement they can still reap the financial benefits of a care home investment UK for many years.

Maintenance Included

The maintenance of the property or the unit you invest in is covered by the care home operator. As well as maintenance, the care home operator will also deal with the tenanting process, making the investment hands-free and therefore very easy on investors who only have to write the initial cheque and then sit back and enjoy a good rental yield indefinitely.

Amenities Add Value

In a care home community, there will usually be amenities available to retirees. These amenities can include exercise classes, recreational activities and educational courses. This is great for residents as elderly people need mental stimulation and social activity to stay happy and healthy. It is also great from the perspective of the investor because it adds value to the property, meaning that it will be attractive to retirees and enjoy high tenancy rates, making it a more rewarding investment.

Less Wear and Tear

Since the tenants will consist of elderly residents, there will be no children or young adults living in the home. As a result, there will typically be less wear-and-tear on the property, helping it to maintain and appreciate in value.

Ageing Population

As discussed, the aging population in the UK means that there will be an increase in elderly people who will need accommodation such as care home units. This steady and consistent market will ensure that your investment has constantly good occupancy rates and therefore better returns.

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What You Need To Consider When Investing In Care Homes

buying retirement property as investment

Although care homes investments have been one of the best performing asset classes on the market today, like any investment there are risks involved and it is important to review the ins-and-outs of any deal to understand the specifics of the investment and if it is right for you.

Monthly Fees

There are monthly fees that can arise if you hire a property management company for your care home maintenance. While many care homes don’t require you to pay a fee for maintenance it is still something you need to ask if you are on a tight budget or want to maximise your earnings. The good news is that most care home investments don’t need you to pay the management fee or do any of the management, however each investment is different and you need to check the small-print.

A Specific Market

If you are investing in a care home unit you have a very specific niche market to cater to. Unlike traditional buy-to-let properties, not everyone will be able, or want, to live in a care home. For this reason, you may have some concerns about the tenancy rates and whether the rental income will be stable. However, it’s important to remember a niche market doesn’t always mean small earnings. Because of the growing number of over 65’s in the UK and the predicted further increase, it would appear that there is no better time to invest in such a targeted market.

Limited Locations

The location of your care home investment is highly important, as not every area will have a care home with high prospects. The most popular areas are away from cities, closer to the countryside. Therefore, you should focus on targeting those locations, where the rental income and annual yields will be much higher.

Care homes are generally located in an area that feature postcard-views in picturesque villages and towns outside of the hustle and bustle of larger cities. There are care home ‘hot-spots’ all over the country, away from large conurbations, which feature open spaces and a slower pace of life and therefore appeals to elderly residents.

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Are Care Home Investments A Long-Term Property Investment Strategy?

Care home investments tend to suit those investors who are investing for the long-term. This is because the rental yields are high, as are occupancy rates, so most returns are made on the residual monthly rentals. Whilst capital appreciation can also bring profits, these properties are small and purchase prices are low compared to most property investments so although these units may appreciate in value at a similar ratio to regular buy-to-lets, due to the lower purchase price the pound-for-pound profits are less attractive.

A further reason why these units make sense as a long-term venture is that they are ‘hands-free’ investments which require minimal ongoing work on the part of the investor, as the care home operator will manage every aspect

Most care home investments are on a 10-year lease with a 10% net rental yield assured, which gives investors peace of mind. The care home provider or developer will also usually have a buy-back option in year 5 of around 110% and in year 10 of around 125%. If you are investing in a care home that you purchased at a cost of £90,000, the buy back for the fifth year would be £99,000 and £112,500 for the tenth year. Combined with the high rental yield this is why many investors see care homes as a valuable investment with big financial benefits.

At Sterling Woodrow, we pride ourselves on helping new property investors get a solid start in the market and are happy to speak to you about your long-term goals and ambitions in property investment.

We also work with experienced investors to help them increase the value and profitability of their portfolios.

To book your complimentary property investment consultation with one of our senior portfolio managers simply click the button below and complete the short form and we will call you back at the appropriate time.

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