4 Things You Need to Finance an Assisted Living Home on Its Potential Income

You can buy a care home and qualify for the loan on the property's potential income, not on your tax returns. That is a DSCR loan, and on an assisted living or residential care home it turns on four things:

1. A licensed operator and a signed lease.
2. Income the property can support.
3. An appraisal of the real estate.
4. Equity and the right owner.

This is the investor path from our guide, How to Finance an Assisted Living or Residential Care Home.

1. A licensed operator and a signed lease

The operator who leases the home is where its income comes from, so the license and the lease are the first documents to line up.

• The tenant holds the license. The operator should hold, or be applying for, the state license for this address. Ask for a copy and check its capacity. Each state uses its own license name; see the table in our guide.
• The lease is signed and complete. Monthly rent, term, renewal options, and who pays taxes, insurance and repairs. Write license upkeep into it: the tenant keeps the license in good standing and tells you about any license action.
• The license survives your purchase. Licenses often do not move with a sale. In California, an RCFE license is forfeited when the licensee sells or otherwise transfers the facility or the facility property (Cal. Health & Safety Code 1569.19). If your seller is also the operator, confirm with the state licensing office how the license continues before you sign.

2. Income the property can support

The loan qualifies on the property's potential income, not on your personal income. Bring what shows it: the lease, the operator's license and, if the home is already operating, proof the rent is being paid.

3. An appraisal of the real estate

The appraiser values the real estate, and the loan is sized on that value.

• Describe the care use. Have the lease, the license and the operator's payment history ready for the appraisal so the property is described accurately.
• Only the real estate supports this loan. When a sale includes the operation, appraisers of senior housing allocate value among the real property, the furniture and equipment, and the business itself (Appraisal Institute). The business is financed another way; see SBA in our guide.

4. Equity and the right owner

• Equity. Surest Capital's care-home program lends up to $3 million at up to 65 percent loan-to-value; terms vary by scenario. Plan on at least 35 percent of the price down, plus closing costs.
• Reserves. Plan to keep cash in reserve after closing. We'll tell you how much for your scenario.
• How you'll hold title. Decide whether you'll buy in your own name or through an LLC or corporation, and tell us up front.
• Business purpose only. Federal rules treat a loan on rental property the owner does not live in as business credit. Plan to live there more than 14 days in the coming year and that changes (12 CFR 1026.3, comment 3(a)-4). If you or your family will live in the home, this is not the right loan.

Sources

• How to Finance an Assisted Living or Residential Care Home, Surest Capital
• The Appraisal of Senior Housing, Nursing Home, and Hospital Properties, Appraisal Institute
• California Health and Safety Code 1569.19, FindLaw
• 12 CFR 1026.3 and Official Interpretation 3(a)-4, Consumer Financial Protection Bureau