22 Jul July 22, 2020 – Residential Living Gene Guarino
Gene Guarino – Founder/President of RALAcademy and Author of Blueprint: How To Start A Residential Assisted Living Business – Read interview highlights here
Too many people think backwards. What worked ten years ago?
I say go to where the puck is going. There is a silver tsunami of seniors
in ten years. This business is good now and will explode in ten years.
Gene Guarino is the President, CEO & Founder of Residential Assisted Living Academy™, America’s #1 source for senior care home investment and business education. He also is the creator of RAL NAT CON, the industry’s annual national convention on residential assisted living. Gene has over 30 years of experience in real estate investing and business, and he is now solely focused on investing in the mega-trend of senior assisted housing. Having trained tens of thousands of investors and entrepreneurs over the past 25 years from across the country on how to turn single family homes into cash flow machines, he now specializes in helping others take advantage of this mega-trend opportunity. Gene is the author of Blueprint: How To Start A Residential Assisted Living Business, which aims to save your time, effort and money as you embark on the journey to financial freedom through the residential assisted living business opportunity.
Highlights from Gene’s Interview
First of all, let me tell you a little bit about the assisted living industry. When it comes to what we do with Residential Assistance Living, we do it in a single-family home, as opposed to the larger what I call big box: 80 or 100 or 200 beds. So in the Residential Assisted Living, it’s a home that’s been converted for this use, and it’s a home; not homelike. But on the bigger box facilities, they could have all the amenities, whether it be a dining hall, a movie theater, and all of the other things that come with it. Some people would rather have that, and others would rather be in a home, stay in a home, and have this smaller community. Both of them, you can make a lot of money; either as investors or an owner-operator. But on the residential side, anybody can play. I’m just going to say this, everybody’s going to get involved in this one way or the other. You’re either going to own the real estate and the business, both, or your family member is going to be lying in a bed writing a check to somebody who does. If it’s a nine or 10-storey building or like an apartment for old people, it’s assisted living and that’s the function of what it is they’re providing, but I designate that in my vernacular as a big-box facility versus the home.
So here’s what the difference between single-family home and big-box facility looks like. Most people think one person, one home. So the reality is, kids grow up, we move out, and they’ve got all this extra space. One of the seniors, maybe it’s the mom or the dad, sometimes they pass away. One person is left, their family is wondering if they’re okay, they’re trying to take care of them. At some point, they look for a solution. Now mom doesn’t want to leave home, but she’s not able to take care of it or herself. So at that point, they look for the solution. Most people understand that there’s the big building with the sign, the whole campus, brand new and older ones, but brand new facilities. But most people are not aware that there’s almost 30,000 of these single-family homes across the country: some of them may have five people, some 10, some up to 20. In some states, it’s unlimited. But to be real, you have to have a certain size home, the location is critically important. But the amount that they would pay as senior in the single-family home versus the big-box could be exactly the same, more or less, just depends. But again, the average person in assisted living is just like mid-80s, they need some help with their activities of daily living. The kids may have the financial ability, maybe they don’t. But if they do, they’re going to put them in the best place they can. They want them to be loved and taken care of.
But when you have a bigger facility where you have the big-box, it’s usually what’s called a Continuing Care Retirement Community (CCRC). So they move in, in independent living, when they needed to go to the assisted living right next door on the same campus. If they need it, they go next door to the memory care or the skilled nursing. So it’s all in one campus and they’re set for life. In a home, it might be either independent living, like think of the Golden Girls. So there’s a great business opportunity for startups to buy homes that you rent by the room to these seniors, where you’re not providing any care, but just a community co-housing opportunity, and double the cash flow in your real estate investment, or you can convert it into the assisted living. That’s what we do and what we teach people how to do.
Here’s the deal with the location being of critical importance. So when we say location, it’s not oceanfront mountaintop, it’s not that over the river and through the woods is good once a year. But for Residential Assisted Living, if you and I are brothers, and we’re going to be going to visit mom, we don’t want to have to drive an hour to get there, we want it to be close to where we live. So when I say location, it’s really about demographics. Is it conveniently located, are there highways, can I get there? Then draw a circle 20 minutes, not miles, because in California, that could be two miles. But 20 minutes around that area, those are your likely clients. The client is you and I: we’re the one who’s going to choose that home for mom and dad, we’re the ones who are going to pay that bill. By the time somebody moves into assisted living, they rarely know what it cost. If they knew it was $5,000 a month per person to live in that room, that’s more than they paid for their first house when they first got started. So location is close to you and I, people with a higher income. When I say higher income, not top of the top, cream of the crop, but definitely not the low end. So whatever median household income is in the area, what we’re looking for is those segments to that area that are, let’s say twice that median household income. So now they get the money to pay for mom and dad’s care, they’re not relying on the state or Medicare or Medicaid. We focus on private pay, that way we could have a nicer home, nicer service, better staffing, everything is better, and we can do good and do well.
So the first thing for Residential Assisted Living is location. I’m in a home right now and I’m in my neighborhood right now, this would be a perfect example of where to be: higher income, nicer homes. Certainly, a ranch home is preferable if anybody has mobility issues. I’m not in assisted living, but I haven’t had a two-storey house in 20 years, it’s just more convenient. But I don’t need to necessarily take a house and convert it. If there’s an empty lot, I could build it. But usually, we take a home that exists in that neighborhood and we convert it into. So the changes you might do in the home are things like: grab bars near the toilets and showers, you might take out some bathtubs; make them walk-in or roll-in, you might take out carpet and put in something easier to clean and maintain; like hardwood, tile, linoleum. So those are the kind of things you would do. You’d convert space from maybe one large bedroom into two smaller bedrooms, because a private room is more desirable and you can charge more for it. You might convert the garage to the bedrooms. So those are the kind of things you would do, but it’s always about the location.
Then, the first thing I want to say is there’s two investments here: one is the real estate side, the other is the business. You can be either or both. So let’s just start with the real estate before we get into the business and staffing, etc. If you have a home right now that rents for $2,000 a month, and you make a few hundred dollars a month in profit after all your expenses, that same home could be leased to an operator of a Residential Assisted Living. I’ll use the word business, but it’s a group home for the elderly. We can talk federal Fair Housing Act, you can do it etc. But you could lease it for let’s say, $4,000 a month. Well, why would they be willing to pay twice the market rent? Because they didn’t have to buy the house, come up with a downpayment, and maybe they negotiated with you to do some of the renovations that I described. But if you were to get $4,000 instead of $2,000, now you’ve got $2,000 and a couple hundred dollars in positive cash flow. So from a real estate investment, it’s a great option.
The other side is the business. But you and me, we’re not going to be the manager, we’re not going to be the caregiver. One of the questions I get all the time is, what if your caregiver doesn’t show up, they call off? Well, if you go to a restaurant and the owner lives in another state, they’re not going to fly in and cover the shift behind the grill. The manager of that facility is going to find somebody to fill that shift or do it themselves. But I’m the owner, I’m not the day-to-day caregiver or manager. So we hire a manager, the manager could be a caregiver who is with the seniors on a day-to-day basis. Maybe they have the job title of manager, maybe they get paid a little more. If I have a standalone manager, it’s not a full-time job to manage one home, they could manage three or four of these homes. So we do multiple homes in areas, we call it a three pack. But the staffing is 24/7, somebody’s on-site and available all day, all night. So the staffing is your biggest single expense from a business perspective, up to 50% of the gross income that we collect goes towards staffing. I can go through the numbers, but for an average single-family home used for Residential Assisted Living, the net after all expenses should be about $10,000 per month.
Here’s what you’re going to do. Location is first, we’ve gone past that now. Now bigger is better, more bedrooms, more bathrooms, but I live in a house that’s 6,000 square feet with three bedrooms. In 6,000 square feet, there’s lots of rooms that can be converted. So I don’t want to think current bedrooms because most homes are four or five bedrooms. That’s what it is, that’s the norm for a “big house”. But I like to set 3,000 square feet. So here’s our rule of thumb at RALA, 300 square feet of living space per resident is very comfortable. So if I had a 3,000-square foot home, the footprint or the house itself, I could reasonably with some reconfiguration get 10 to 12 residents in that house.
Now, let me give you the state’s minimums; it’s pretty generic across the country. It’s 100 square feet of usable floor space, not the closet, not the bathroom, for a single private room. 80 square feet per person if you have a shared room. That’s the state minimums, I want you to do double that. But the reality is, you could take a single family home and according to the state’s minimums, you can have an 1,800 square foot home, have five bedrooms with two people in each one, have the two required bathrooms, a kitchen, a family room, a dining area, and do it in 1,800 square feet. But let me say it again, I don’t want you to do it that way. What we do is luxury, our homes are 4,000 to 6,000 square feet with those 10 people in it. The bedrooms are beautiful, there’s family rooms, there’s beautiful kitchens that you and I’d be proud to have, there’s libraries and sitting areas. But the bedroom itself, that might be 10×12 by 12×14; it’s usually that size. It’s the rest of the house that is shared communal space.So a 3,000 square foot house can be reconfigured and be very appropriate for 10 people.
Again, if you go 10×10 at this state minimum of 100 square feet, that’s like a prison. You and I both want bigger, the kids want bigger, so I highly recommend that you do bigger. If you’ve bigger rooms, the key to that is you’re in a beautiful area, four-bedroom house flat lot, you go from the front of the house out the back of the house. So what you might do is consider converting some of the space inside the house into more bedrooms, converting the garage attached into bedrooms and even putting an addition out the back. Also, if you’ve already got a caregiver for someone in your house, that caregiver can take care of two or three people. It’s actually easier for them to take care of a couple of people, because now they’re communicating with each other.
Here’s how it is most of the times. People have heard about real estate investments, they’ve also heard about seniors in the coming of the baby boomers, but Residential Assisted Living is one that everybody’s going to get involved in one way or the other. As a matter of fact, during the current crisis that we’re in, and I think so much of this is overblown and ridiculous; it’s all going to end November forward. But with what’s going on right now, Residential Assisted Living has been booming. People are moving out of the big-box into the small because it’s safer, smaller is better. The big-box knows that and they’re trying to do all they can to be small and safe. If your mom and dad are in a great place, God bless them and that’s wonderful. But I’ve heard horror stories of seniors being locked in their room with meals being brought in three times a day. That’s prison, that’s bad, that’s not what you want. In our homes, they aren’t running around with gas masks and so on; it’s a home, there’s only a few caregivers. But everybody’s going to get involved, there’s a real estate play and a business play, and it’s doing good and doing well. You can make a whole lot of money as you’re helping a lot of other people. Everybody’s going to get passionate about something and they’re going to do something, but too many people think backwards, so what we were 10 years ago. I say go to where the puck is going. The baby boomers are coming, there’s a silver tsunami of seniors that’s going to hit the shores in 10 years from now. This is good now, but it’s going to explode in 10 years, and then it’s got a 20-year run. This is a place to be for business and real estate for the next 20 years.
So here’s some free stuff. I’ve got a free book I wrote, Blueprint: How To Start A Residential Assisted Living Business. I’ve got a webinar that you can watch to learn a lot more about this, and you can make a phone call and ask us all the questions you want. Easy website, RAL101.com. This is not about me, there’s a real need out there. Right now some people are looking for a business to start to get stability, and others are looking for meaning and purpose in their life, and there are millions of seniors who need this too. So it’s a win-win, but you have to take action by taking the first step.
Highlights from another Interview
In terms of changing your retirement strategy because of the pandemic, if things are long-term, probably not. In fact, people who are contributing to 401(k)s and are still working, etc, I’m telling them to absolutely keep those contributions going because your dollar cost is averaging, you’re buying more shares when the stock price is down. Obviously, when the stock price goes back up, you’re buying fewer shares. At the end of the day, when you get to retirement, your average cost per share will neither be the lowest you ever paid for it nor will it be the highest you ever paid for it, you will have averaged that cost. So this is a good time to keep any kind of dollar-cost averaging program going, don’t stop because you’re a little scared by the market. It’s really an advantageous period for you, you’d like to see dips where you’re occasionally buying on the cheap, so to speak.
As far as the roller coaster and fluctuations that the market is going through, liking the roller coaster and caring about it are two very different things; I don’t think anybody likes the roller coaster. But to put that in perspective, what we’re telling our clients is that we get more information in a single hour now because of the internet and the speed of communication over the internet, than we used to get back in the 70s in a full year, just take that into consideration. So it’s not any wonder that the market is more volatile because it’s reacting to updated information, literally second by second. So nobody likes the volatility. But if you look at it over the long-term, if people are consistent investors and just keep investing over time, the market has really rewarded long-term investors for getting in and staying and not jumping in and out based on their emotions, which is the worst thing. Just as a quick aside, I was once asked what’s the most valuable thing that a financial planner can provide their client? My response was to keep them from making silly mistakes, and that’s certainly one of them, which is letting your emotions rule the day.
In fact, just yesterday, I had a client that pinged me on email probably four times because he was reading articles and he was saying, what about this, and what about that? I finally said to him in email, you’ve got too much time on your hand. You’re a long-term investor, not a day trader, and you’re asking me to look at day trading opportunities. Is that what you really want to do? He finally came back and he said, no, I want a long term program that will set us up for success. So we did a little bit of massaging the portfolio, adding a couple of positions, but the day trading will drive anybody nuts.
So let me address in order a few of the questions that I hear. So number one, if you are desperate, if you’ve lost your job, and desperation is really a thing right now: you’re not aware of what the next amount of income is going to come in, how long unemployment is going to last, what is Congress going to do about extending the extra $600 a week, all of those kinds of things. So here are the five tips that we’re giving people if they are indeed desperate. Number one, control the controllable. In other words, control your costs, cut your expenses, and then cut them some more; be ruthless.
Number two, renegotiate everything you can. So call all companies that you’re a customer of and tell them you’re actually canceling unless you get a better deal; number one. Call all credit cards, car lenders, mortgage lenders, utilities, and ask for a six-month furlough from payments during the pandemic. What you will find is that many of them agree without any question. In fact, I didn’t need this, but the credit union that has my car loan automatically suspended payments for three months. In fact, I panicked the other day and said, “Oh, my God, my payment quit going in. I’m going to get a late notice on my credit.” So I called the credit union. “Oh no, we just furloughed payments for three months, we did send an email.” I never saw that email. I just went, “Oh, thank God. I was panicking that I was three months late and going to have a big ding on my credit report.” He said, “No, it’ll just restart automatically in July.” I was like, thanks very much. So some companies are doing that automatically, and maybe three months isn’t long enough and you can negotiate that with them.
The third one would be to refinance any debt you have: so mortgages, car loans, even credit cards. You may have to qualify for a mortgage, and if you’re unemployed, that’s very unlikely. So that may not be the best of the options, but to the extent, you can, then do so: ask for a lower rate on credit cards in particular. If you have a primary home and a rental, and you’re combining those two mortgages and putting all of it on the primary so the rental will be paid off, you’re taking advantage of a couple of things. One, obviously the homeowner mortgage interest deduction is better, so that’s really the primary motivator for you because you can have a larger amount of deductible mortgage interest on a primary residence. Your mortgage, however, on the rental, you may want to talk to your tax advisor about this because that’s really a business enterprise, and that mortgage isn’t limited. Meaning you can have multiple properties and millions of dollars of debt that you’re writing off, and there’s no limit on that because it isn’t a primary residence. So you may want to switch.
I’ll just give you a quick example. I had some clients many years ago, unfortunately, the husband’s now deceased, the wife is still alive, and they had a rental property in San Diego near Balboa Park, which is a very nice area, it was a fourplex as a matter of fact. So they had the mortgage on their home, but they’ve had that mortgage for so long and the property for so long that they actually were not getting any deduction, they didn’t quite have enough deductions to be able to itemize back in the day. It’s even worse now under the new tax law. So I advised them simply to refinance that mortgage onto the business, onto the rental property itself, because there’s no limit. You don’t have to worry about itemizing personally, you still get the deduction against the rental income. So they did that and it freed up extra cash flow from the rents for them to spend, because they were able to take the deduction. So talk to your advisor about where you best leverage that loan in order to get the deduction that you’re seeking.
Number four, do not take out any new debt unless it is an investment that will go up in value. So our take is that this will not be a short economic recovery and debt will saddle your finances. So be careful about debt. Then number five, I think is the key one and probably the most focal point here, is that it’s okay to be selfish, the only economy that matters is the one at home; you and family come first. That’s why I say it’s okay to be selfish, particularly when you’re in dire straits, and say, what do we need to do for our family to survive, and that’s your in-house economy, it’s not everything else going on outside?
Then the other part of the question is, if I’m not in financial straits, my income is uninterrupted, that’s my case, for example. Because fortunately, we were able to convert to operating virtually with no problem whatsoever, it went very seamlessly, we’re still bringing in new clients and generating revenue and I think clients need us even more during difficult and challenging times, and they’re doing things that are wonderful. So if you are not in a financial hole, here are the five tips for you. So number one would be to harvest tax losses. So if you’ve got positions in your taxable portfolio that are sitting on losses, harvest them against other gains in your portfolio. You can turn around and buy the winning position, the gain position back, the very same day. Because the 30-day wash rule applies only to the losses, I can only deduct those losses on my return if I do not buy back that losing position within 30 days, and why would you if it’s losing? But that allows you to what we call to step up your bases.
So if you bought Apple or Amazon or any of the FANG stocks years ago, and now you’ve got this enormous gain in them, you’re going “Oh my God, I’m handcuffed by the capital gain. If I resell this stuff, I’m going to get hammered.” This is an opportunity to the extent you have other losses in the portfolio or even on real estate. As long as it’s a taxable account, you can harvest those losses against the gains and then you buy Apple again the same day and now your bases are the fair market value that you paid today. So you’ve gotten rid of all that accrued capital gain. One example of that was a client, right after the three-year downturn in 2001 and 2002, she came to us tired of being a landlord. She had a rental property and she had losses from her portfolio of $225,000, but over here a property that had a gain, and she was tired of being a landlord. So we advised her to go ahead and sell that rental property, and she was able to use up all of those losses from her investment portfolio against the gains in her rental portfolio and got all those proceeds without any tax whatsoever. So it doesn’t have to be the same kind of asset, it just has to be in a taxable account. You can’t do it with an IRA or 401k, but you can do it in a taxable account. So harvest tax losses.
Number two, consider a Roth IRA conversion from an IRA or a 401k. If you’ve been laid off or furloughed from your job, you have technically separated from service, and that means you can roll your 401k over to an IRA. You can do this even if the company hires you back, as long as you’re separated from service when you take care of that transaction. Paying tax now on a Roth conversion, while stock prices are down and perhaps you’re unemployed and on a much lower income, allows those shares to appreciate tax-free in the future.
Number three, evaluate retirement plan contributions and distributions. If you can increase your contributions to the retirement plan, do so; dollar-cost averaging while prices are down is buying at a discount. Then required minimum distributions under now the SECURE Act has been increased to age 72 and have been entirely waived for 2020. So you do not have to take a required minimum distribution this year if you’re out of that age.
Number four, rebalance the portfolio. Make sure your portfolio accurately reflects your risk profile and time horizon. That’s one of the things we’re doing a lot with our clients is making sure that the portfolio accurately reflects their risk profile. Then lastly, and I repeated this, refinance your mortgage or other debts. I’m doing this for everything, personal story. Just about to close on a 15-year mortgage, my wife and I bought this house, our retirement home ultimately; she’s retired, I’m not, but this is where we will retire. Three years ago, we took out a 30-year 4% fixed mortgage, I’m now refinancing to a 15-year 2.625% mortgage. My payments will be almost the same, just slightly more, and I’ll cut 15 years off that mortgage. So rates are down, if you have the income and can qualify, refinance that mortgage. Then be aware that car loans can also be refinanced down to a very low rate. So even if you’ve got a 2% or 3% rate, I’ll bet you that you can get a one. So go out and look at that. So those are the five tips if you’re not in a financial hole.
Then, the next question is should you reallocate for the FANG stocks? Actually, I’ll give you a little bit of a modification to the FANG stocks, because we’re actually now calling them the nifty FANGAM; so it’s Facebook, Apple, Netflix, Google, Amazon, and Microsoft. So here’s where you need to be careful about this. When you look at the S&P 500 in terms of Exchange Traded Funds (ETFs), SPY is the symbol for the S&P 500. What you have to understand is that these six stocks now: Facebook, Amazon, Netflix, Google, Apple, and Microsoft, now represent 21% of the capitalization of the index of the S&P 500. That’s enormous, the last time this happened was in 1999, and thus, they account for 21% of the returns. In the RSP, that is the equally weighted where all 500 stocks in the S&P have 0.1. So these six stocks are weighted to 0.1, they’re just six, so it goes out to 0.1, six out of 500 stocks. Well, SPY, the 500 ETF is down 6% for the year at the time this article I’m referencing was written, whereas RSP, the greater S&P 500 is down 16%. So remember, same stocks, it’s just that SPY is heavily weighted toward those tech stocks, as they have larger market caps. But RSP treats those equally whether they’re tech stocks or non-tech stocks in the 500. So you have to be careful about realizing, am I loading up on something that’s already run up pretty high? So we’re still allocating to those stocks, but here’s how we’re doing it. We’ve had clients come forward, very astute of them to say, “Hey, John, I’ve got 50 grand or 20 grand or 100 grand, how can I allocate that as this might be a good time to buy?” Our take has been to dollar cost average that over five months, because we don’t know where the market bottom is and we don’t think the market has seen its bottom. I don’t mean to be pessimistic, it’s not doom and gloom, but you can’t have 45 and a half million people unemployed and stop the worldwide economy on a dime, and not expect that you’re going to see recession; we are going to see a recession.
So what we’re telling people is, this is running, in our view, almost entirely on stimulus money. So when the stimulus goes away, and it’s not going away anytime soon, Congress is clearly going to have to do the third round. That’s another topic for maybe another day how they’re going to target that, etc. But I do believe they’re going to do another third round because there are still people who need significant help out there, businesses and families. So stimulus money isn’t going away anytime soon. But when it finally does, and sooner or later, we all know that will happen, Congress will quit approving free money so to speak, then the economy has to stand on its own two feet. If you go look at earnings for the S&P 500, they’ve fallen completely off a cliff because we stopped the economy on a dime. So what we’re doing is we’re dollar-cost averaging. You might say, rather than five months, maybe I should do this over 10 months or whatever magic number you think is appropriate. That’s because we don’t know where the bottom is. So I have quite a number of clients, probably a dozen right now who I’ve selected 10 positions that I’m recommending, and I’m saying, let’s put 20% of your money into those 10 positions over each of the next five months, and see how it goes. Everybody’s going on board and it’s actually doing well. It’s going to be interesting when the market does drop because part of what I tell them is make this commitment; don’t stop at month-three because you don’t like what’s going on in the market, keep going. So make your commitment for five months or 10 months or whatever your magic number is.