Retirement homes serve a crucial role in our society by caring for the elderly and disabled. While these facilities aim to help those who need extra care and provide community, they also incur revenue. In fact, assisted living facilities (ALFs) are one of the few explicitly for-profit sectors of the healthcare industry (though some are non-profit organizations.)
How do retirement homes make money? We have compiled a comprehensive list of the 11 ways retirement homes make money. This ranges from picking the right zip code and charging a higher rent, investing in amenities, going non-profit, or utilizing related party transactions.
There’s a myriad of ways to make money owning a retirement home. However, some of the options available to increase cash flow are not as ethical as others. We will get into all the specifics below. At the end of the day, it really comes down to location and your own personal relationship to money. You need to decide which is more important–prioritizing others’ needs or putting more money in your wallet?
How Much Money Can Be Made in Retirement Homes?
Before we dive into the different ways that retirement homes make their money, let’s look at how profitable they are in general.
In 2019, the total revenue for the retirement home industry was over $72 billion. It is also estimated that the average revenue stream has grown by 2.1% each year (IBISWorld).Because retirement living can be affected by the housing market, revenue streams do depend on the price of living and whether there is a recession or if the economy is in decent shape.
The need for retirement and assisted living facilities is increasing every year. In fact, it is estimated by the year 2050, that there will be nearly 85 million adults over the age of 65+ who will be in need of an assisted living environment. If there was ever a time to invest in an industry, now is the time to invest in retirement living.
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- Pick the Zip Code Wisely
The range of rent a retirement home can charge its residents ranges anywhere from
They range from $1,500 a month to $10,000 a month. This number has a lot to do with the location of the facility in question.
In other words, the zip code of the retirement home can heavily depend on how much the facility is able to make in revenue. Not only that, but wealthier neighborhoods where you can charge higher rent will attract wealthier clients who will pay $10,000 a month. However, charging more means offering more, which means paying for more.
For example, the rent one could charge in the small town of Emmet, ID (zip code: 83627), would be wildly different than what one could charge in San Jose, CA (zip code: 94088).
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- Larger Facility, Larger Revenue
The size of an assisted living facility, as well as the amenities it offers, does depend on the profit an AFL can make. If a large facility (50 plus residents) with top of the line amenities and activities maintains constant capacity, it has the potential to make six-figures a year. If that facility is then able to create a brand and image that could mean expanding to multiple locations, then there is a possibility of eventually making millions in profit.
According to McNight’s Senior Living, the largest senior living companies in the country include:
- Brookdale Senior Living (capacity for 102,000 residents)
- Holiday Retirement (capacity for 72,748 residents)
- Life Care Services (capacity for 34,889)
That might give you a gauge as to just how much revenue can be brought in if you are charging 100,000 residents $5,000.
- Provide Additional Auxiliary Services & Amenities to Residents
Some nursing homes will provide extra services and charge their residents additional fees for the use of these services. These services range from TV packages, special food packages, entertainment and activities, and specialized health care and attention.
Some of the best amenities we’ve seen offered include:
- Laundry services
- Massage therapists
- Beauty & Barber services
- Fitness classes
- Group excursion opportunities
- Activity rooms
- Art classes
- Church and chapel service
- Library & work facilities
This Southern California retirement facility caters to senior arts programs, and the apartments they offer come in 1 to 2 bedrooms. They offer a pool and fitness facility and are walking distance from a large variety of restaurants and shops. It’s a notable example of extra amenities offered in assisted living facilities around the country.
How Adding Extra Services Can Get Shady
It is one thing to charge residents for extra amenities that add quality to their life, like the above list of things. However, there have been some questionable approaches to this theory. According to MarketWatch, there was a Los Angeles based assisted living resident who grew ill and needed extra assistance. The retirement home she lived in began charging her an additional $500 for the following: administering medicine, dressing her, bathing her, and wheeling her to her meals. MarketWatch website.
Once the resident grew too ill to stay in the facility and had to move to hospice, the retirement facility still charged her for the next 30 days, even though their contract states that a resident does not have to provide 30 days’ notice in the event of medical issues that cause immediate need to relocate.
As you can tell, there are ethical ways to go about making money running a retirement home. And then there are non-ethical ways of running a retirement home.
- Keeping at Capacity
The most obvious way that retirement homes make money is by charging their residents rent to live on the property. With more than 1.4 million Americans living in ALFs, there is a huge demand for nursing homes. The supply certainly meets the demands when it comes to assisted living.
When a nursing home always keeps their beds filled, they are making the most amount of money they can. When beds go empty, and AFLs are unable to generate new tenants, the nursing home will see an obvious decline in revenue.
The Risks of Letting ‘Just Anybody’ In A Retirement Homes
We don’t mean discriminating against people of different genders or races. Retirement homes are meant to have specific criteria they need to meet when accepting new residents. When management is hard-pressed to meet capacity, some individuals might attempt to cut corners by allowing mentally ill or unstable persons, as well as individuals who may belong in a more intensive care facility, to become new residents.
- Receiving Kickbacks from Nearby AFLS
When retirement homes reach full capacity, but there is still a great demand for residents seeking a living situation, some nursing homes will receive financial kickbacks from other facilities with a vacancy if they refer prospective people over to their facilities to be potential residents.
- Accepting Medicaid
Choosing to accept Medicaid does bring in money as it is a form of payment. There are pros and cons to this, however. While accepting Medicaid opens the doors to more potential residents, it also means earning way less money from those residents. There is also a whole lot of bureaucracy that comes along with Medicaid.
Which is why nursing homes that accept Medicaid do the following:
- Limiting Number of Medicaid Beds
An estimated 80-90% of retirement homes accept Medicaid. In fact, most AFLs are quite dependent on Medicaid payments as a main source of revenue.
When Medicaid is the main source of revenue for retirement homes, those facilities typically make 25% less income. The Medicaid reimbursement amount equates to losing 2% revenue per resident (Texas Health Care Association).
More Income (Should) Equal Better Care In A Retirement Home
The reason for limiting the number of Medicaid units is not just a greedy attempt to make more income for the facility. Typically, unless we are looking at an unethical situation, more revenue inside a nursing home equals better quality of care.
When a nursing home makes unsubstantial amounts of revenue, it directly affects the number of nurses, aides, and the overall quality of care (food, supplies, etc.) If a facility has to cut back on staff, the lack of nursing staff can lead to such things as more frequent and unnecessary falls (which lead to more patient injury and higher admission to the ER), patients with unchanged diapers, bedsores that grow infected, and unanswered call lights.
According to Dr. David Gifford of the American Health Care Association, the ability to purchase important medical equipment and medications needed to ensure the safety and health of the nursing home residents is adversely affected when a retirement home has too many Medicaid paid beds.
- Utilize Related Party Transactions
Three fourths of all retirement homes in the United States were for-profit (New York Times.) You might be wondering, why are nursing homes an allowed for-profit sector? This is, in part, to help reduce the unnecessary loss of finances that lead to poorer care for nursing home residents. The corporate restructuring that occurred sought to move past the need to rely so heavily on Medicaid as the only form of retirement home revenue.
This outsources the work and prospective liability of nursing homes onto LLCs or Corporations to help with the burden. These types of business dealings are called “related party transactions.” 11,000 AFLs utilize this tactic (New York Times). New forms of capital are being poured into assisted living facilities every year by various corporations as a lucrative new venture. It takes billions of dollars to satisfy the demands of assisted living capital needs.
The theory, of course, is that by bringing on outside companies, it helps keep the retirement center afloat (without relying entirely on Medicaid.) However, there are some downsides to this method of revenue seeking.
The Disadvantage Of Retirement Homes
Some nursing-home owners and their relatives own and control the companies they outsource to. This is a financially lucrative decision. However, in a lot of cases, the money that is generating higher amounts of revenue does not actually make its way back into the retirement facility. Instead, that money is siphoned off back into the corporate web, all on the resident’s dime. In certain cases, that money even finds its way, illegally, into the pocket of its owners.
In the case of two Long Island accountants who owned 33 different retirement homes, they pocketed almost $12 million of what should have been operating expenses for their facilities. A nurse who worked for them testified against them, stating the homes they owned were grossly underfunded, not having enough money to buy new diapers, sheets, or linens (LifeMattersMedia.org).
Obviously, the trouble with related party transactions is that it does not guarantee an improved quality of living for its’ residents. Which brings us to our next money-making option:
- Go Non-Profit
Nursing homes that are non-profit guarantee that all their staff make decent salaries, while ensuring that none of that money is nicked and stuffed into the wrong pockets. Year after year, non-profit retirement homes report providing a higher quality of living and care, lower hospitalization rates, more nursing staff with less turnover, as well as fewer residents on antipsychotic drugs (MedicareAdvocacy.org).
Making your retirement home not-for-profit engenders loyalty and creates camaraderie within the facility that corporate-owned facilities don’t typically have. And non-profits do make a “profit.” They just reinvest it in the facility.
- Investing in Bonds
One lucrative way to make a nursing home more profitable is by investing money into bonds. This is, of course, assuming the nursing home in question is located in a first-world country, the property has the potential to contain 50 or more units, and that you have capital to invest in the first place (for a 50 unit plus retirement building, you’re looking at about a million dollars.)
Assuming all the above is true, placing that capital into bonds will ultimately reap a large return on the multi-family property that one purchases to create said ALF. If you invested money into a bond with a sub-5% return, submitting a 25% down payment, your eventual return would be around 13-18% per year.
The return on the bond down payment should be around 25-40%.
- Cutting Costs
Cutting expenses is, unfortunately, one way a retirement home can increase its income. However, this obviously greatly affects the quality of care its’ residents will receive. Paying staff lower wages can lead to higher turnover rates, which often lead to less acceptable care. Cutting back in the type of care and quality of food and provisions, etc. also lead to unfortunate circumstances for retirement home residents.
Instances where companies have cut back on costs to save a buck often end up resulting in lawsuits. These are often due to maltreatment or avoidable medical issues that arose because the necessary supplies or staff were not available.
Costs To Consider In A Retirement Home
Nursing homes must pay employee wages, utilities, internet, nursing staff, security camera, food supplies, bedding and furnishings, medical equipment, etc. Let’s not forget the rent/mortgage owed toward the property. As you can imagine, this all adds up fast. The amount of supplies generally depends on the quality and quantity of supply purchase:
- Food Supplies – $2,000-$5,000 (per month)
- Utilities – $200-$600 (per month)
- Medical supplies – $500 -$1,000 (per month)
- Clean Bedding, Furnishings, etc. – $500-$1500 (per month)
- Nursing Home Administrator – $102,744 – $128,575
- ALF Manager – $35,000 – $75,000 or more a year.
- Marketing Director – $40,000 – $70,000 per year
- Nursing Staff – $30,000 – $50,000 per year
- Administrative staff – minimum wage ($10 – $15 per hour)
- Kitchen Staff – minimum wage ($10- $12 per hour)
The Darkside to Making Money with Retirement Homes
Unlike hospitals, nursing homes are 75% for profit, which means they have a duty to deliver profits to the ownership groups and shareholders of corporations that they run off. However, the revenue stream for retirement homes is capped, because they can only make so much per day per resident, at capacity.
This cap always puts a tremendous amount of pressure on nursing home management to keep assisted living facilities at max capacity. While this may seem a simple task, it sometimes means management makes poor decisions to get by. They may, for example, choose to cut costs. Or they will take in individuals who need to receive treatment at facilities that are equipped to work with people who have dementia, for example.
The Key Take Away Of How Retirement Homes Make Money
Owning and operating senior living facilities has become an increasingly more lucrative business as the years go on, and demand only increases. There is enormous potential to make anywhere between six to seven figures, depending on the location, size and whether the business is for-profit or non-profit.
Unfortunately, there are many ways people take advantage of their retirement residents, but cutting costs to save money, charging for amenities that might not be worth the asking price, and by investing related party transactions where the additional corporate revenue goes back into the corporate web as opposed to into the facility itself.
If you are curious about how retirement homes make money because you wish to invest in or own one in the future, it is our advice you learn to do so in the most ethical way possible. However, if you are looking to make seven figures regardless of the outcomes for others, then you’ll likely want to invest in a for-profit facility in Florida, with a resident capacity of 5,000+, where you can charge residents $10,000. You’ll also want to invest in related party transactions where you and your immediate family members own or work for at least half of the corporations you work with.