Steve Schwarzman, I remember saying once, mentioned that he liked real estate because “real estate doesn’t talk.” I love this quote. He was saying that one of the big pluses in owning property is there is less human interaction. Sadly, humans can be error-prone, whiny, wild, crazy and a million different other things (or emotions)…Welcome to the wonderful world of business! Here is why I welcome you with open arms to group home ownership: When you start servicing your customers – especially in the affordable housing realm, group home arena, assisted living arena, memory care arena, sober home or whatever particular niche you play in; you are dealing with human beings!
What do I mean by this? Someone once mentioned that in a normal, upper-end apartment complex you would be operating using Pareto’s Law and 80% of your tenants will be good and 20% bad. Well the lower down the food chain you go, you must expect the inverse of the above statement. Now hopefully you never get to the point where 80% are wrong, and only 20% are good, however, if you do, also expect the financial rewards to move in the same sequence.
Real Estate Details
A Class Apartment Building: 4.5% CAP RATE (Tier 1 / Tier 2 City). This means that if you shelled out $1,000,000 you would make $45,000 and probably 90% of your tenants will be good.
B Class: 5% – 6% CAP RATE with only 80% of your tenants being good
C or D Class: 7 – 12% CAP RATE Depending on City. In this scenario you may have some real, real ROUGH Dudes living at your building, tearing stuff up and possibly threatening you. These are the realities.
What about Group Homes Profits, Sober Home Profits and other Care Home Type Industry Profits and Yields?
To answer your question, significantly higher than an average C of D grade apartment building! In my opinion, most small businesses are going to trade for 2-3 times earnings. Something that is real estate backed and has a fairly consistent recurring revenue component like a sober home or a group home is going to command something along the lines of 3-4 times earnings in my opinion. 3-4 times earnings are the same vernacular as 3-4 X your group home profits or sober home profits. And we are talking about annual sober home profits and annual group home profits, not monthly.
What does this mean for you? Your group home profits should be in the 20 – 30% range assuming that you went out and bought one. On the flip side of the coin, if you went to sell one, expect to be able to sell your group home or sober home for a 3-4 multiple of what you are earning.
Remember the sliding scale from above? The business of owning Group Homes, Sober Homes or Transitional Homes is significantly more management intensive which is also why the returns are higher!
The Challenges
The demographic you are now dealing with is going to command a premium as far as your return on investment. You are not buying a “building that doesn’t talk!” You are buying, building or starting a home (real estate) with people fitting the above description – i.e. recovering alcoholics, addicts, etc. or people with other challenges.
What you will find in this business is that often the other types of people go hand-in-hand. You are going to have people that are mentally challenged who forget to tell you that they also have done every drug imaginable and known to man. We aren’t talking about smoking a joint here folks. We are talking street drugs coupled with hard alcohol etc.
Don’t Be Scared
Now I am not trying to scare you off because this business can be very rewarding – both emotionally and financially – but don’t expect to positively impact everyone you come in contact with. On the flip side of the coin, don’t expect everyone to be bad! You are going to come across a number of quality, kind, sweet people that need nothing more than a caring person like yourself to give them a place to live….Just make sure to understand the realities of this business.
SUMMARY OF GROUP HOME OWNERSHIP
If you are looking into how to start a home for mentally challenged adults demographic, remember that this is not passive investment in the beginning! If you have the means you can buy a group home or sober home. When done right you would have all your money back probably within 1-4 years. And if you do it this way, you would essentially be a passive owner. However, if you are starting with a smaller bank-roll, expect to get your hands dirty! The Group Home and Sober Home business requires you to deal with a lot. You have to deal with a different element of society than most apartment complexes, it also requires you deal with management that deal with the people.
What’s in it for you to run one of these homes? Why wouldn’t you just provide housing to a traditional renter? Watch this video to see the amazing outcome this business model will have on your community AND your wallet:
If you are looking for additional information on how to start a group home, halfway home, transitional living home, sober home, foster home, ICF/MR home, DADS Home or other type of care home for people with disabilities, check out our FREE 10-PART COURSE on starting your very own income-generating group home.
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