Any advisor serving baby boomer clients knows we are in the midst of the most significant demographic shift this country has ever seen. Figures from the U.S. Census Bureau tell us that some 40 million Americans are past the traditional retirement age, and that figure is expected to double over the next few decades. I look at that demographic inevitability and see opportunity.
It doesn’t matter who the current president of the United States is, or which in direction interest rates are moving — 12,000 Americans every single day are turning 65. The 75-and-older segment of the population is expected to grow by 84% between 2010 and 2030, an increase of almost 16 million seniors. All of these older people are going to need somewhere to live. And for savvy investors, and their advisors, that presents a timely opportunity.
I’ve always considered real estate as an important part of a truly diversified investment portfolio. It’s an asset class that I’ve put my own money into and I’ve seen some of our most successful and wealthiest clients build tremendous net worth by including real estate as part of their investment strategy. In the current market, I think senior housing is among the most attractive segments of the real estate sector.
For my own clients, I try to avoid development deals or anything that’s highly leveraged in favor of more stable, high-quality, long-term investments, like apartment buildings or assisted living facilities. There has been a steady increase in occupancy and rents but a limited supply of new inventory, due to a severe contraction in construction lending caused by the credit crisis.
Clients Love the Cash Flow
Anyone who survived the 2007-2008 market crisis is understandably skittish about relying too heavily on a stock portfolio. For investors looking to diversify into an asset class with no correlation to the public markets, real estate is hard to beat.
I think the best returns can be found by investing privately, but the tradeoff is the illiquidity factor. The portion of any client’s portfolio devoted to illiquid investments is obviously going to vary according to the individual’s circumstances, investment horizon and long-term goals, but, a focus on senior housing can be an intelligent way to take advantage of this demographic shift.
One of the things that my clients like about investing in senior housing, as opposed to other illiquid investments like private equity, is receiving cash flows right out of the gate. They get tax and other benefits, rental income that keeps up with inflation, and positioning on the right side of the demographic shift that’s happening in the country.
In times when the markets start to drop, as they did for a few days in August, clients really appreciate having some portion of their portfolios in investments like this that provide steady monthly income and have no real correlation to the public markets. They can rest easy knowing rental or interest income came in last month and they’re going to get it again next month, regardless of what the market is doing.
I also look for opportunities that allow my clients to co-invest alongside some of the biggest family offices and senior housing operators in the country. Becoming a minority investor in these real estate portfolios allows our clients to take advantage of the deep pockets, expertise and scalability of those already in the space. If the illiquidity of these private investments is not right for an individual client, we might also look at publicly traded REITs that specialize in senior housing. The primary problems with REITs is that they offer a less attractive rate of return while doing nothing to temper stock market volatility, but for some clients, the liquidity factor is a reasonable tradeoff for taking on additional risk.
When I share this demographic trend and its implications with clients, it really seems to resonate. It’s an idea that they can readily grasp, and having a dialog with clients around senior housing gives us another chance to build deeper relationships.
In working with real estate, as with any alternative asset class, it is imperative that the advisor perform stringent due diligence on every aspect of the investment. I have been advising clients that certain cities have been overbuilt with senior housing. A recent Wall Street Journal article confirmed my view. It noted that a senior housing construction boom in a number of major markets could lead to an excess inventory, which could have a negative impact on both occupancy rates and rental pricing.
Advisors will also need to be able to educate their clients on subjects like 1031 exchanges for deferring real estate gains, the benefits of depreciation and cost segregation, and other arcane matters. For advisors new to the real estate game, it can take some study to get up to speed. But in the long run it can be worth. After all, the demographics are inevitable.