Is the cap rate on a six-bed residential assisted living house real, or is the buyer purchasing a job with a mortgage attached?

Question

Anyone who has learned to read small multifamily by the unit will try to read a 6-bed RAL the same way, and it will not sit still. Take a house at $520k in a decent suburb, licensed, six residents, blended rate $4,800, which is $28,800 a month gross. The seller's broker quotes a 9 cap on $47k of NOI, and that number is very hard to make appear. A realistic labor build: one caregiver on days, one on evenings, one awake overnight, plus relief, call it 230 hours a week at $19 loaded, roughly $19k a month. Food and supplies $1,800. Utilities, insurance, admin and software, another $2,500 or so. That leaves maybe $5,500 before debt service and before anyone is paid to run it. On a $520k house at current rates that is roughly break even. So where does the broker's NOI come from, and if the deal is split into PropCo and OpCo, what rent can the OpCo actually carry?

Rena Expert · Accepted Answer

The broker's NOI is almost certainly a house-level number that treats resident revenue as rent and ignores care labor, or it's an owner-operator number where the owner works day shifts unpaid. Ask for a payroll register, not a P&L. If the register shows fewer hours than your 230, someone is on the schedule for free.

Your build is close to right, and the piece worth tightening is the overnight. If your state requires awake staff rather than sleeping-on-premises, that's a full extra shift you can't compress. Check the staffing minimums in the license category, because they vary by state and they set your labor floor regardless of census.

On the split: PropCo rent is whatever the OpCo residual supports with coverage. If OpCo produces $5,500 to $7,000 a month of EBITDARM at full census, rent at 1.25x coverage is about $4,400 to $5,600. Capitalize $5,000 a month at, say, 8 percent and you get $750k of building value, which is above your purchase price, and that's the version where six beds are full and nobody is sick. At five beds full you're at $24,000 of revenue with the same staffing, so $4,800 of gross margin evaporates and coverage goes under 1.0. One empty bed out of six is the whole equity return.

Six-bed homes don't really trade on cap rate. They trade at replacement cost of the house plus some goodwill for a stabilized census, and the goodwill disappears the moment the owner-operator leaves and takes the referral relationships. Also price workers comp and professional liability properly, since caregiver comp rates per $100 of payroll are among the higher classes and differ a lot by state.

kevin_lombard · Answer

The awake overnight thing sent me back through my state's rule book twice. Mine allows sleeping night staff at four or fewer residents and requires awake staff at five and up, which is the same threshold cairn is at. At $19 loaded that's about $4,100 a month of difference for the exact same house. I don't understand yet how anyone models the fifth bed as accretive once that kicks in.

Is the cap rate on a six-bed residential assisted living house real, or is the buyer purchasing a job with a mortgage attached?

2 replies