Investing in healthcare real estate is one of the smartest moves investors can make today. Not only is healthcare a service everyone needs, it’s also a sector backed by demographic growth. Every day, 10,000 Americans turn 65. In the next 20+ years, our aging Baby Boomers will need increasing medical services and specialty housing. That means even despite the pending bubble burst due for our economy, the healthcare real estate sector is likely to remain strong.
Still, for many investors, it’s simply not practical to invest directly into a senior housing facility, hospital, or medical office building. That’s why you’ll find an increasing number of investment opportunities outside of direct real estate investment popping up in the healthcare market. The following are the top four ways to make an easy—and promising—investment in this consistently high-performing field.
For those looking for the feel of a direct investment—without the networking and high capital threshold—online crowd-funding platforms are the easiest bet. They generally have a low investment minimum (think $10,000 to $25,000) and allow investors to pick from a wide variety of specific investment opportunities, for instance a medical office building in Dallas, a memory care unit in Pittsburgh, a hospital in Seattle, or a mix of all three. As such, the investment is not always diverse in and of itself, but it may allow you to diversify your personal portfolio. The upside to crowdfunding real estate is that it’s easy. The downside is that you’ll need to invest with incredible discernment—both for the projects you choose and the online platforms you select. Be sure to determine whether the company you select limits investment to qualified investors, and how much care is given to ensuring that status.
Private equity funds work similarly to crowd-funding, but with higher investment minimums and an off-line investment platform. Just like crowdfunding, private equity funds use capital from many people to invest in various projects—including both renovations and new ground-up developments. You may find private equity funds devoted solely to investing in senior housing, medical office buildings, or a mixture of any number of different real estate types. Generally, fund managers seek to diversify the funds (for instance, some may invest in a mix of senior housing types in different geographic locations) to ensure the highest possible returns. Because they are generally smaller and managed offline, you may find more personal involvement from the fund manager, and greater communication about specific project development throughout your investment.
REITs offer a mix of traditional and alternative investment, allowing investors to enjoy the returns of real estate while operating within the confines of the trading market. REITs invest 90 percent of their investors’ capital in real estate, and then distribute 90 percent of net income to shareholders via dividends. Companies like Ventas (VTR) and Welltower (HCN), for instance, build portfolios of various healthcare real estate investments—including senior housing, medical office buildings, and even international hospitals. Because of the number of investments REITs make in each fund (over 1,000 in many cases), it may be difficult for investors to track individual project performance or impact. One other consideration: unlike private equity and crowdfunding projects, most REITs exist as landlords for existing, operating facilities. For instance, the average senior housing facility owned by the average healthcare REIT is 18 years, meaning the facilities are not always the most highly profitable or up-to-date.
ETFs like the Long-Term Care ETF (OLD) are a hybrid of private equity and REITs—forming a portfolio of different healthcare REIT investments. That could include global companies that profit from senior housing, nursing, hospitals, biotech, or age-related illness. ETFs would be good for those interested in highly diversifying their investment in healthcare. However, ETFs could also be considered the furthest removed from the concept of direct real estate investment.
The right healthcare investment opportunity will vary by individual and their specific comfort level with risk or interest in the industry. However, demographics hold that investments emphasizing senior housing may offer a more consistent outlook, especially as the healthcare market continues to find its legs in terms of profitability in the modern era. Indeed, in its Q1 2017 report, NCREIF showed that on a 10-year basis, senior housing outperformed many other sectors of commercial real estate at 11.13 percent vs. apartments (6.42 percent), hotels (4.38 percent) and retail (8.16 percent). Senior housing performance is only likely to increase as the aging population continues to grow—regardless which investment option—crowdfunding, private equity, REITs or ETFs—you choose.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Jess Stonefield is a communications consultant for Senior Living Fund.