Top 3 Ways to Finance Your Res. Assisted Living Homes

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Gene: Hello, this is Gene Guarino. I’m your host today for the REI Classroom. And what we’re going to be talking about is residential assisted living. I’m the founder of the Residential Assisted Living Academy, and today’s topic is, “The Three Best Ways to Finance your Residential Assisted Living Home”.

Mike: This show is sponsored by PassiveRental.com.

Gene: So let’s go right into it. The first way is, use your own money, if you have it. Now when I say use your own money, some of you could reposition what you’re currently doing. You may have rental properties, you may have apartments, you might have raw land. But if you reposition by selling those assets or financing them or cross-collateralizing them, repositioning that will free up the money to be able to do this.
The reason why you might want to do that is when I go through with my students how much money you’re making in your current portfolio, a lot of times it’s kind of subpar, you’re not getting what you really want to get. So when I say reposition, the purpose of that would be to make $5,000, $10,000, $15,000, $20,000 a month net from one home, not to have three-four different properties that are producing little or nothing. So one is use your own assets.
And by the way, your IRA, your self-directed IRA, those are great sources as well. If you don’t know how to do that, I’m sure there’s a section here in the REI Classroom to find out about it.
So the second way is to use other people’s money, OPM. Now I know you’ve heard of that before. But anytime you don’t use your own money, it’s OPM. Whether it’s a bank, whether it’s an SBA loan, whether it’s owner or seller financing. So let’s go right through that.
If you can’t qualify from a bank or traditional lender to borrow the money, an SBA loan isn’t going to happen either. Because the SBA loan really just makes it safer for the bank. For you it’s the same, it’s still your cash, your down payment, your collateral, what’s the real estate. It really does come down to your character, and then it comes down to your cash flow and see, are the ratios good enough there? And your credit scores? Those are kind of the 5Cs.
But if you can get through that gauntlet, borrowing money from a bank, again, residential assisted living, it’s a home, it’s a single family home. So if you can go to a bank and borrow it as a rental property, non-owner occupied, that’s typically a 20% down payment. But if you go to a bank and if it’s owner occupied, it’s even less.
Now, I’m not suggesting you live in the care home, but some of you right now own a home that would be a perfect conversion for residential assisted living. You’ve got the best financing already. Low interest rate, long-term, and you’ve got the leverage right there because the loan to value could be close to 100% in many cases. So you could do it owner occupied, but again, if you’re not there to live in the property, don’t try to fool the bank, that ain’t going to work. Don’t do that.
But what I do want to encourage you to do, if you go to the bank to qualify for that loan, non-owner occupied, maybe it’s 20% down, maybe a little bit higher than fair market interest might be 4%, 5%, 6% instead of 3%, 4%, 5%. So that’s a legitimate way to do it. But an SBA loan, a Small Business Administration loan, you still need to qualify through the bank, but here’s the good news. If you’re buying a home that’s already converted into the residential assisted living facility, then the average residential lender is not going to want to lend you the money. The average commercial lender is not going to want to either because you don’t fit in their box. But SBA you can get past that.
So if you can qualify, and the SBA gives their guarantee on top of, they’ll lend you up to 90% on the real estate, and up to 75% on the purchase of the business. And that’s significant. But you do need to have if it’s brand new for use, some experience, some background, at least a team that’s helping you do it.
So you can use other people’s money going to the bank and financing. In addition to that, you can go straight to the owner. And if the owner is wanting to sell, maybe nobody’s made them an offer.
You know, I just did a training this weekend, it’s so clear to me that so many people are just afraid to make an offer because they don’t want to offend the seller, they don’t want to say, “Oh, will you take back the note?”
First of all, use their language. Would you rather me give this money to the bank or give it to you? And if you do that properly, a lot of the times people are like, “Yeah, I’d rather have that money instead of you giving it to the bank.” Now, it’s owner financing, it’s seller take back, but they don’t get those words. So if they don’t get it, they’re not going to say yes. So use the words that they’re used to.
And if you’re actually buying the residential assisted living business, frankly, a lot of those people are going to have to do owner financing in order to sell that business. So start there, it’s a great way to start.
So we talked about cash, your cash, or using your own assets, repositioning, and then the second way is to use other people’s money. So we said go to a traditional bank if you can qualify, if the property qualifies, and you can get an SBA loan which guarantees, it makes it safer for the bank to lend to you, and then you can go right to the owner and do owner financing.
Now, the other ways to do that are with hard money lenders, which is a high interest rate for a short period of time. If that’s what it takes to take down the property, you can refinance later. Or it could be private lenders, which frankly is what I prefer to do. That’s a whole other topic. But I love to do private lenders.
There’s literally billions of dollars sitting out there right now on the sideline, looking for a home, looking for a place to be. And they don’t want to just put it in a bank and earn nothing, put it in a CD and earn 1% or a bond and earn 3%, 4%, 5% and hope the municipality stays in business. No, they’re looking for a home for their money and it could be you if you know how to present yourself right. I prefer going to private lenders. So use other people’s money.
And the third way is a combination of the two. When I say a combination of the two, here’s a typical scenario. Somebody saying, I’m asking X, $500,000. I own it free and clear, but I want some cash in my hand. All right, you want cash in your hand, how much and what do you need it for? Now the reason why I’m asking the “what do you need it for” is, I want to find out what the real motivation is. I’ve had people tell me, “I just want to take a cruise.”
Well, great. If I could get you on a cruise for a week with you and a friend, all expenses paid, and then I get you $5,000 a month for the next 30 years, would that be good for you? And a lot of times people are like, “Yeah, that’s exactly what I want.” I didn’t talk price, I didn’t talk interest rate, it’s giving them what they want.
But if they say, “I want to own it free and clear but I want $100,000,” and your first thought is, “I don’t have $100,000,” here’s the deal. You can find $100,000 if the asset is worth $500,000. Whether it be a hard money lender or private lender or somebody else, I’m sure you can borrow $100,000 against a $500,000 asset.
So borrow that money from somebody else and then say to them, “I’m going to give you $100,000, and then the other $400,000, I’ll pay that to you. Instead of the bank getting all the money, I’m going to pay it to you at 4% interest over the course of the next 30 years.” And if they say something, “I can’t wait 30 years, I may pass away,” well, what are you thinking? Well, 10 years. Well, great. We’ll just do it so that you get payments for 30 years, but a balloon payment in 10 years. So you show them the amortization schedule and point it out. In 10 years’ time, that $400,000 loan is really still worth $350,000. So at that point you just refinance. So that’s a combination.
So whenever you’re making offers, I always say make three: cash, all finance, or a combination of the two. Even though you’re getting the cash from somebody else on that combo, it’s still cash to them. So don’t worry about is it first or second position. What you’re doing is getting them cash now, getting them payments later. If you do that in all of your transactions, life will be a whole lot easier.
Come back next time and I’m going to share more with you about residential assisted living. Thanks for listening to the REI Classroom.

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