How Payroll Tax Cuts Could Affect Senior Housing Investors
The effects of the payroll tax holiday could make their way to the senior housing and assisted living real estate market.
One of the major headlines right now is Trump’s payroll tax cut. The executive order trump signed is aimed at cutting or deferring payroll taxes. If you’ve ever received a W-2, you know that a portion of your paycheck goes to pay Social Security and Medicare.
The little bit of extra money on a paycheck, or less self-employed taxes paid, might add a little to the bank account, but the payroll tax break could cause some trouble for senior housing and assisted living investors and operators. While facilities getting private pay might not feel an immediate impact from medicare tax cuts and social security tax cuts, other facilities that rely on SSI benefits from their residents or medicare reimbursements could see a steep cut in the amounts they receive.
Why would this happen? Well, there has already been talks for the past few years about these payments being on the chopping block if medicare or social security get their funding cut. Even a payroll tax deferral could put enough strain on an already struggling system to reduce the amount of reimbursements or SSI benefits paid directly to providers.
I don’t have to explain what these cuts could mean to these operators. Less income = bad. This would be bad at any time, but occupancy is already down across most facilities due to the pandemic. Less income + lower occupancy = really bad.
The private pay investors and operators may be shrugging this off, or even thinking this may end up being good for them. However, this can spell trouble for these folks as well.
Facilities that have historically relied heavily on SSI and medicare will have to start looking for more private pay residents. What’s one common way for companies to get a piece of a competitive market? It could either be free toasters or lower prices. In this case, it’s more likely to be lower prices.
We’re not just talking about a few beds opening up with lower prices, we’re talking about thousands of beds in some markets. Even the smaller markets will have a new supply of hundreds of beds opening up.
This doesn’t mean everyone is doomed. Private pay facilities that get a premium for a higher end property and a higher level of service aren’t usually working with price sensitive residents. The facilities dropping their bed rates will have to find ways to cut their costs, which will likely result in a less qualified staff, meal budget cuts, delays in maintenance, and less frequent property updates.
I’m in the business of selling these types of facilities, and have been recommending a handful of healthcare REITs with these types of properties. So you know I’m going to point out the silver lining and the opportunity here.
There has already been a lot of consolidation happening in this industry. Small operators have already been struggling, and many have already been absorbed by the larger players. Several agencies have already stopped awarding new contracts to new providers due to cuts in state funding in many areas.
As smaller facilities close, residents are being funneled into other existing facilities. This is making it harder and harder for new operators to come into the business and open new homes.
A lot of the providers that are relying heavily on SSI and medicare have already been operating on thin margins the past few years. Funding cuts and a highly competitive private pay market is sure to thin out the crowd.
Small facilities will consolidate into larger ones that have lower costs per bed. Current investors and operators with access to capital will be able to take advantage of these opportunities to absorb the residents from the small homes. Investors with multiple small facilities will have to bite the bullet and purchase or build larger homes to consolidate into fewer properties. That choice will ultimately be more profitable for them in the long run.
New investors entering the market will have opportunities to do the same. Struggling facilities with poor management will be offered at a discount for investors to acquire, improve operations and absorb residents from other struggling senior housing and assisted living businesses.
This will also open up a lot of great acquisition opportunities for the stronger REITs. Look for healthcare REITs with a healthy debt/EBITDA ratio, and access to liquidity without the need to sell a significant amount of new shares. These will be the players that are ready and able to make these discounted acquisitions. I also wouldn’t be surprised to see some mergers, which could be a real nice payday.
I know this is quite the chain of events I’m predicting from the potential payroll tax holiday, but I see this same scenario eventually playing out either way. The payroll tax cuts are just likely to speed it up. Even the fear of executive actions from President Donald Trump resulting in medicare and social security cuts could cause funds to be prematurely reallocated.
This is no different than any other market change for any industry. There are opportunities for investors to make a lot of money, and others will bury their heads in the sand and lose everything. Choose wisely on which one you’ll be.
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