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With Higher Interest Rates, How Do I Finance My Assisted Living?

By April 13, 2024May 8th, 2024No Comments
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How to finance an assisted living facility purchase is a frequent topic here.  Some of the first articles at SeniorCareMike.com talked about financing, like this one.  Lately, it’s been a more significant topic as interest rates climbed.

Inflation and interest rates are all over the news.  The consumer price index was recently reported at 3.5%, leading many to think that interest rates will remain higher for longer.  (As of the day this article was written, the 10-year US Treasury yield is about 4.5%.)

Despite higher costs and challenges with financing, many still want to buy and sell assisted living facilities.  So we’re often asked this question:

With higher interest rates, how do I finance the assisted living facility I’m buying?

The good news is that financing remains widely available from many sources.  The bad news is that almost every source of financing costs more than it did a few years ago.

It’s helpful to keep things in perspective.  The near-zero interest rates during the pandemic and following recovery weren’t typical.  While interest rates are higher than they have been recently, they have been much higher in the past.

That may not be much consolation when you borrow money today to buy your assisted living facility.

Are there sources of more affordable financing?

The answer to that is yes and no.

The interest rate markets affect nearly every lender.  As their costs of funds go up, the interest rate they need to charge goes up, too.  So many lenders will have higher interest rates than they did recently.

Some sources of financing might offer more competitive interest rates or other terms to help your deal make sense.  Here are a few:

HUD

The Department of Housing and Urban Development (HUD) has been a source of financing for senior living for a long time.  The costs of working with HUD can be steep, and smaller loan amounts sometimes don’t justify the higher upfront loan costs.  However, working with a HUD lender can often make sense if you buy or refinance a larger assisted living facility with a loan of $1 million to $3 million or more.

The key to a HUD loan isn’t just a competitive interest rate. Instead, it’s the 35-year amortization that makes a loan payment more affordable, even if it means you’re not paying off the loan as fast as you would like.

SBA

The Small Business Administration (SBA) has loan programs that are attractive to some borrowers.  While not for everyone, SBA loans may allow some buyers to finance a higher percentage of the cost and have a lower down payment even if the interest rate isn’t better than other options.  Some buyers find preserving more cash helpful when buying an assisted living facility in exchange for a higher monthly payment.  The SBA option may not save in costs, but it may provide a source of financing when other lenders do not, which is the difference between moving forward or placing your plans on hold.

Local Banks and Credit Unions

I’ve had a lot of success financing assisted living facilities for myself and clients with community banks.  Local credit unions are also a good option for some borrowers.  One benefit of working with a local lender is potential flexibility.  While a larger lender may have strict lending guidelines without much room to bargain, local lenders may be able to work with you to find a loan that meets your needs.  That might mean a lower interest rate, a longer amortization, or something to make your property more affordable.

Pro Tip For Buyers:  Many assisted living facilities are financed by community banks.  A community bank may be the current lender for the facility you purchase.  Ask the seller about their current financing and whether they would make an introduction to the lender.  The current lender may be eager to keep a good loan on their books with a new borrower but a familiar property.  Their motivation may be high enough to help you get a better deal on your loan.

Sellers

Most sellers prefer to receive all cash at closing, and for good reason.  They have plans after their sale, taxes to pay, and likely a desire to take some risk out of their lives.  However, asking a seller to take some of the purchase price over time may have advantages for you and them.

A seller might be seeking a way to keep a steady income after they sell their assisted living facility.  Receiving monthly payments from you for an extended time, with a reasonable interest rate, might help them meet their need for income.  In addition, a seller’s tax advisor may be able to help them structure the transaction as an installment sale allowing them to spread out the tax impact of their sale.

If you’re the buyer, seller financing may have many advantages.  A seller may be the most flexible lender you can work with.  You can negotiate an interest rate and terms that work for both of you.  The costs and qualifications may be less than those of a traditional lender.  Plus, you can obtain your financing much faster than with usual borrowing sources.

Of course, with seller financing, there are disadvantages for both buyers and sellers too.  Moving fast and saving money may be features of some seller financing but be sure to have professional help whether you’re the buyer or seller.

Conclusion

Interest rates may remain higher for longer.  If you’re buying or selling an assisted living facility, it’s essential to consider all your options to find the best financing for your deal.

Have questions?  Leave us a comment or send us a message.  We may be able to help.

 

 

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