Mark Hutton unpacks the intricacies of investing in the niche of Residential Assisted Living (RAL) within the commercial real estate sector. Mark sheds light on why RAL is becoming an appealing asset for investors, the synergies of combining the real estate with the operating business, and the pivotal role of SBA-backed loans in this space.
Key Takeaways:
- RAL's Appeal: With traditional long-term hold properties offering lower cash flow due to prevailing interest rates, RAL presents a lucrative opportunity for investors seeking higher returns.
- SBA-Backed Loans in RAL: These loans provide certain advantages such as long-term fixed rates and high LTVs, making them a preferred choice in the RAL space. However, they also come with specific controls like pre-defined lease terms.
- Learning from the Best: Mark emphasizes the importance of seeking mentorship and learning from those already successful in the RAL space, ensuring faster progress and fewer pitfalls.
Mark Hutton | Real Estate Background
- Founder of Mimi’s House Assisted Living and Memory Care
- Portfolio:
- SFRs, commercial apartments, retail mall, resorts, and RAL homes
- Based in: Cincinnati, OH
- Say hi to him at:
- Best Ever Book: The Debt Millionaire by George Antone
- Greatest Lesson: Building a senior-centered service business is 10x more rewarding than owning rental real estate.
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Transcript
Slocomb Reed:
Today's episode is brought to you by Presario Ventures, a private equity real estate firm based in the booming Austin, Texas market. To learn how you can invest in the future of Texas with presario ventures, visit info.presarioventures.com forward slash best ever. That link is in the show notes.
I'm Slocomb Reed. Today we're joined by Mark Hutton, good friend of mine here in Cincinnati, Ohio, Mark runs Mimi's house, assisted living and memory care. They develop own and operate residential assisted living homes. His current portfolio consists of Mimi's house, as well as some single family rentals, commercial apartments, a retail mall. And he is invested in resorts as well, although his focus is RAL. Mark, can you tell us a little bit more about your background and your current focus?
Mark Hutton:
Absolutely. Thank you, Slocomb. I'm happy to be here with the best of our crew. Mark Hutton here in Cincinnati started my career as a mechanical engineer out of Purdue, go boilers, and got into real estate just a few years ago with my lovely wife, Jeanette. She and I started rehabbing homes, like a lot of people do when they start getting real estate bought a few homes, buying holds, went to a fourplex, then discovered the joy of apartments and got into the apartment space, bought a number of complexes, which we still have one. And then we discovered RAL, Residential Assisted Living, and have absolutely fallen in love with that. And we've been diving into that pretty aggressively in the last few years.
Slocomb Reed:
Nice, so Residential Assisted Living, what is it that appealed to you about that given your other experience in real estate investing?
Mark Hutton:
That's a great question. Apartments have a lot of appeal right now. They're very popular, and I certainly enjoy them for the most part. But when we started residential assisted living, it's about taking care of seniors and taking care of them better than any big box nursing home, anything you can think of can actually do. So we do it better. We do it at a cost savings to the resident and their families.
And simply from the numbers standpoint, because I am an engineer, the numbers are spectacular. So I'm associated with the residential assisted living academy out of Phoenix, which is where we learned about this. And their slogan is do good and do well. And now that we've been in business for a few years with Mimi's house, we absolutely know that's true. We are doing good for residents. We're doing amazing, great things for they and their families, but we're also doing very well financially. So to us, that's a real win-win.
Slocomb Reed:
I've got a couple of questions here for you based on that, Mark. The first is you said that you are able to deliver better care more affordably. Why is that when big boxes have greater scale than you do?
Mark Hutton:
Yeah, that's an interesting thing that surprised me as well. Cause I always thought scale was where it needed to be, but care generally boils down to the number of caregivers that are available to the number of residents.
And even in the nicest crystal chandeliered big box home here in our area and other parts of the country, it really boils down to how many caregivers. And we've hired some of our caregivers now. One caregiver has been responsible for 30, sometimes 40, the highest I've heard is 46 people. Now, if you're one person, I don't care how huge your heart is, you can't do a good job taking care of 46 people.
Contrast to that way in our first home in Mimi's house in Loveland. We have two caregivers for eight residents. That's a four to one ratio our caregivers know the residents know them. They all become part of the same family and it's a better environment all the way around.
Slocomb Reed:
That makes a lot of sense mark, but a four to one ratio instead of a forty to one ratio is not exactly cost savings on your part operationally. How is it that it's more affordable to your residents?
Mark Hutton:
I'm glad you picked up on that. So really the difference is in a big box facility, you have this giant building, maybe 100, 150 beds or bedrooms. So yes, you have a lot of residents in there, but you also have huge amount of overhead and they've got kitchen staff, they've got cleaning staffs, they've got maintenance staffs, they have executives, they have all of these things.
And all of that costs a lot of money. In addition to a monster mortgage for say a hundred million dollar facility. They have a lot of overhead. We do this in residential homes. Our overhead is very small. Other than labor and payroll, it's not much more than a single family home. A little bit more food, maybe a little bit more utilities, but our cost of operating the business aside from payroll is very minimal. So that's why we can hire the caregivers in the ratio that we do and still save them money. When I say save money, still the bed rates are pretty high. We're talking big numbers, but if any of the listeners here have ever sought out a assisted living for one of their loved ones, a parent or a grandparent, you know that some of these places are eight, 10, $12,000 a month. So we've moved people into our home where the family was paying 11,000 a month and they moved in with us for 6,000 a month. And it's a monster savings with better care. Now, granted, we don't have the movie theater. We don't have the pet shop and the ice cream parlor and some of the things that some of these big boxes have as far as amenities go. But what we make up for is we have a close knit family. We all sit together, we eat together as a family, we play games together as a family, we have activities as a family.
And for many, many seniors, that's a much better environment anyway, than having some of these other showy amenities, I'll call them that frankly, the seniors don't really even use.
Slocomb Reed:
Yeah. You can buy a lot of ice cream for your whole family and go to a lot of movies with a $5,000 savings a month. So Mark, if I had asked the better question, which would have been, where are the efficiencies in your business plan and your operating style compared to those, compared to your competitors. Correct me where I'm wrong. It sounds like you would have said that because the real estate itself is effectively an extra large single family house, it's much simpler to operate. You have stripped out the less necessary amenities to keep your expenses low enough that you can focus your expenses on the actual care being provided to your residents and they save money. Would that have been a fair summarization if I had asked the question correctly the first time?
Mark Hutton:
Yeah, that's a pretty fair way to summarize that. Yes, we have an administrator, which happens to be my wife, but we don't have administrators and directors and department managers and all of these multiple layers that these big boxes have to have. We have an administrator, we have a manager, we have caregivers. That's it.
And we can run an entire house with 10 part-time caregivers. Some are part-time, some are full, but we can do that. We're in a big box. You might have to cycle through a hundred or 200 caregivers to cover the hours you need on a monthly basis. And I think that's some of the actual dollar savings as well. In addition, when you're just making food for say eight or 10 people, it's really just like making dinner for your family when you have a few extra family members over.
You don't have to make food for a hundred people where you need a giant commercial kitchen and you need three chefs and five servers and all this stuff. Our caregivers do all of that work for us. They're doing the cleaning, they're doing the laundry, they're doing the cooking and the serving, and we all eat together as a family, the caregivers, the residents, and we do when we're at the homes as well. So there's certainly savings there, but even with the much greater cost as a percentage of expenses per resident for labor, it's offset by all the other things you mentioned.
Slocomb Reed:
Best ever listeners. I'm going to transition the conversation to ask Mark questions more specific to the operation of Mimi's house, his residential assisted living homes here in the greater Cincinnati area. But I will say now that Mark is also our guest speaker at the November 7th Cincinnati's best ever real estate investor mastermind. We moved it from October 31st because I and every other parent in the entire greater Cincinnati area will be trick or treating on the 31st. On November 7th, Mark will be our speaker and our conversation, his presentation will be a deep dive into his first Mimi's house home in Loveland, Ohio that I'm just about to ask him about. If you are interested in attending, you can go to bestevercency.com. That link is in the show notes. Also, that presentation will be recorded for the podcast and will air likely sometime in November for you to get that deep dive, listen in on that podcast episode. So, Mark, let's talk about this. Let's start here. I imagine the cashflow potential also had something to do with you getting into residential assisted living. What does that look like in practice right now?
Mark Hutton:
You're exactly right. When I first looked at this business model with my wife, my wife fell in love with the caregiving aspect of it because she had worked with seniors her whole career as a speech pathologist.
And I'm the engineer and I'm the numbers guy, right? So I was looking at the financials and saying, wow, this makes a ton of sense. We can take care of people really well, better than they can get anywhere else. And we can make really substantial profit margins. And honestly, that's what drew me into this. And of course I'm being supportive husband, but now that we're doing this, frankly, the financials are terrific and I'll jump into numbers, but they in comparison to the good we're able to do for the residents and the families. We've seen amazing turnarounds for residents now that have been kicked out of other homes, some multiple nursing homes and assisted living facilities because they just didn't know how to take care of dementia and brain change and Alzheimer's. And when you have a small, intimate family setting like we do and caregivers that can spend time with it, man, it is amazingly fulfilling to see someone go from slumped in a wheelchair, nonverbal for months, to just a couple of months later, walking around the house, maybe with a walker, but walking around the house and giving me grief because I didn't fix his door handle and getting political and telling jokes. And we really truly bring the life back to some of these folks. And it's crazy rewarding from that standpoint. Now, you asked about the money side of things. Yeah, normally, even if you're renting by the room for say an Airbnb or something like that. While we've got a lot of payroll, it's not uncommon for assisted living, even in our small model, to be in the five to $8,000 range per bed per month here in the Cincinnati area. And we're kind of on the high side of that right now in our homes. I don't know if I answered all your questions, no.
Slocomb Reed:
You did. Speaking specifically to Mimi's houses one and two, which I know are already full or accepting residents, meaning the renovation is complete and they're effectively fully funded. Did you raise money from passive investors for those properties?
Mark Hutton:
The first home in Loveland, no, we financed that one on our own. We certainly used bank funding for that, the down payment and some of the reserve funds and such. I always say we got enough gray hairs, we had a little bit setbacks. Plus, we wanted to prove the concept to ourselves as well before we brought anyone else in the so that first one, we fully funded ourselves. Our phase two, which you mentioned, which is up in Mainville, it's been open a month. We're already half filled. That's a 12 bed, much, much larger home, a 9,300 square foot home up in Mainville. And yes, we raised substantial private equity for that through a syndication. In fact, we just finished that raise just last week, actually. Finished the last deposits into the account while I was out in Phoenix last week.
Slocomb Reed:
Congratulations. That's awesome.
Mark Hutton:
Thank you very much.
Slocomb Reed:
I want to come back to the cashflow conversation, but getting there, I will say, as I believe you already know, Mark, the best ever listeners are a fairly sophisticated audience and the majority of them are already passive investors or limited to partners in commercial real estate syndications. So I'm trying to help speak their language here. When you raised for Mimi's house number two, which is complete, we're not making an offer on this episode. What is the terms that you were offering to your investors? Also, I haven't asked this yet. Do you have a targeted hold period for Mimi's house number two, or do you plan to own it and operate it for the longterm?
Mark Hutton:
So all excellent questions. I'll jump into the investor expectations side of things. So for your apartment folks that are used to doing deal splits and equity raises and such, the interesting thing about these properties is that they're these as an asset class anyway, is the deal split is inverted from a normal apartment split. I've certainly done deals in the apartment space where it was 60-40, 70-30, 70% to the investor. These properties cashflow so well that that's inverted. The most recent raise we just finished, as I mentioned, is a 60-40 split, 60 to us as the deal architects, the deal sponsors, which is Janet and I and one other partner.
So the investors own 40% of the deal, collectively. 40% of the real estate and the business, which are two separate entities. So we raised this money in a fund. That fund owns both the real estate and the operating entity. The first home is completed. We got our license a month ago. We already have six out of 12 beds filled and another one is moving in Thursday this week.
And the second home we're building on that same site has already been broken ground. We'll be pouring the slab on that this week as well. It'll be another 9,300 square foot, large luxury ranch home. That'll be 15 bedroom home. So our investors own their portion based on their investment of both of those deals, as well as an additional project we have going on phase three, which are two 16 bed homes over in Mason, Ohio, just a few miles to the west of the mainville location. And so our investors will own their percent portion of all four of those homes when they're eventually finished.
Slocomb Reed:
So a 60-40 split 40% to the LP. Is there a preferred return in there or preferred cash on cash?
Mark Hutton:
Yes, there is a preferred return. I think our prep on that was 10% with basically a zero period because of all the build and the business development side of things. This one's a little unusual for the apartment folks. There is zero returns expected for the first two full years based on all our projections for all the build and development. The upside is, again, the returns are pretty spectacular. So over a 10-year average hold period, our investors are projected to have over 18% cash-on-cash return. That excludes, that's not IRR, that's just the cash-on-cash, because that excludes their equity that's building up over time. And we're building these businesses from scratch.
So when you put a cap rate on the business valuation, the business grows in value pretty substantially over that period of time. And a lot of apartments will be exited in five years or something like that. We really have a long-term hold strategy on this. We do plan on having a refi event in maybe the fifth or sixth year, as long as the conditions are favorable. So the exit strategy ultimately is maybe getting their capital back.
But the way that we like to do our syndications is our investors keep their percentage. Even if I bring their capital account to zero, whatever their ownership share is stays on indefinitely until I kick the bucket or we sell the properties, which is not in the foreseeable future.
Slocomb Reed:
Just to be clear, that's a 10 year hold period, average 18% cash on cash without sale. And factoring in a zero dollar return, zero percent return for the first two years.
Mark Hutton:
That's correct.
Slocomb Reed:
Those are, those are really intriguing numbers to be sure.
Mark Hutton:
They're pretty exciting. And that's why we've been able to raise millions of dollars in this last raise because people are a super excited about it. And quite frankly, a lot of investors are like, yeah, I can make money in apartment and self store commercial and mobile home parks, et cetera. But some investors now are saying I want a little more meaning in my investment. I want to maybe help people or maybe be more charitable. Now, don't get me wrong, this is not charitable. This is a private pay, so this is not Medicaid. This is more in the high end of care. But the fact is, is we're still giving exceptional care to seniors while doing very good on the profit side.
Slocomb Reed:
Mark, my next question. You said for the sake of your capital raise and your partnership with your investors, there's one fund that owns both the real estate and the operating business. There has been a trend recently. We don't talk about it too much on the best of our podcasts. Every once in a while we have a guest come in for it, but there has been a trend of shifting towards operating businesses tied to real estate for investors who are looking for greater cashflow. I don't know if that trend has been popularized by the interest rates.
And the lack of cashflow in traditional long-term hold, in traditional long-term hold or long-term tenancy apartments, as well as other commercial asset classes. But the idea of starting or acquiring and operating business tied to real estate has become very popular. Residential assisted living, laundromats, car washes, other places like that. Most of them less employee and administration intensive than residential assisted living. But the chase is for cash flow. So it makes sense that you're getting significantly greater cash flow with this business plan because there's a lot of operating that goes on. It's not just the real estate, it's also the business. You decided to put both of those into the same fund and raise capital for both. Why not just raise capital for the real estate offer more conventional returns to your investors and then keep the operating business for yourself and pay a nice hefty rent to your investors to create those returns, but keep a greater margin of the cashflow for yourselves.
Mark Hutton:
Yeah, that certainly is a potential option. The issue becomes financing. Very few of these nationwide are acquired and developed using conventional financing.
With conventional financing, you could go that route. Most are done just as we just closed three SBA loans on the acquisition and build process we're doing up in Mainville. Because it is an SBA backed loan, the SBA has a fair amount of control in that. And in fact, not only do they control the lease amount that the real estate entity can charge to the operating entity for the rent.
They actually control the terms of that and they give you the least you're going to use. So that is one of the constraints based primarily upon the financing method that's often used. But the SBA has significant advantages because it is a business and not just more of a passive real estate play. Like an apartment complex would be where you could maybe use Fannie Mae or Freddie Mack financing to get some greater financial benefits. We can utilize the SBA or other kinds of benefits like long-term fixed rates, things like that, that would at very high LTVs 80, 85, sometimes 90% LTVs, they're simply not available at all in the traditional commercial financing space.
Slocomb Reed:
That makes a lot of sense that your debt structure would dictate that it's more lucrative for both you and your investors to structure it this way. That makes sense. So that's the Mimi's house that you have already seen comprehensive success with. So that's the one that we will deep dive into at Cincinnati's best ever real estate investor mastermind on November 7th. Again, for info on that, if you're interested in attending, you can go to best ever since the.com we meet in deer park, which is very central within greater Cincinnati at 6 30 PM on this time, the first Tuesday of November, because I will be trick or treating on the last Tuesday of October, as well, attendees. That said, Mark, are you ready for the best of our lightning round?
Mark Hutton:
Let's do it.
Slocomb Reed:
Awesome. What is the best ever book you recently read?
Mark Hutton:
I'm ashamed to say I haven't read a lot recently, but the best of her book really completely changed my mind on the whole commercial real estate space and larger acquisitions is debt millionaire by George Anso. It got me to understand that without debt, there is no wealth because you can't grow and expand and grow your business without debt. Obviously property is structured, et cetera, et cetera. But it was the book that got me over the fear of, oh my gosh, I'm gonna get a loan for seven figures, are you kidding me? But it got me past that and really launched everything that we've done since that time.
Slocomb Reed:
What is your best ever way to give back?
Mark Hutton:
It's interesting. I think we're giving back actually inside the business we're doing right now. It's very interesting some years back, Janet, my lovely wife, had a bad car accident and she made it through A-OK and is wonderful now. But her doctor said that she probably, all right, should not have made it through that accident. And this is her cardiologist, he said, you should make sure and give back every day. And she described what we're doing with Nimi's house and taking care of people. He goes, oh my, you have that very well covered. So that's how we give back every day.
One other I'll add is we've become very interwoven with the Arielle Academy in Phoenix, which is where we originally learned this. So we also give back by being coaches for that Academy, and we help other students all across the country helping open their homes. And I've had fingers and advice and coaching in homes, literally all over from Arkansas to California to Michigan to Georgia, Indianapolis, East Coast, all over the place. And that's really exciting for me. And that's one way we both give back. Jane and I are both coaches and helping others do what we've done with Mimi's House.
Slocomb Reed:
Nice. Mark, on the real estate deals you have done, meaning properties that you have acquired, and we can include your single families, the apartments, the other things outside of RAL, what is the biggest mistake you've made and the best ever lesson that resulted from it?
Mark Hutton:
The biggest mistake we made early on, and long before we joined our local Rio club here in Cincinnati that corrected a lot of our faults and misconceptions, we bought a turnkey rental. I think it was our second or third rental we bought. We bought it out of state, sight unseen, with the description and promises of a turnkey broker. Saw hundreds of pictures, but the big mistake was I didn't go out to see it. So we did complete that transaction.
It was supposed to be turnkey, right? Supposed to be rehabbed wonderfully, get a tenant put in, property manager in place, cash flowing day one of closing. That absolutely did not happen. The property was not occupied. There was a property manager put in place, put a really crummy resident in there, a small family that didn't pay the rent. We lost money on it every single month we owned it for almost three years. And we couldn't get them to kicked the tenant out for all the lease infractions and everything else. By the time we finally got rid of that property, we then had to sell it at a loss because when the residents did finally move out, they trashed it. So we sold it to a wholesaler. This was in Kansas City. Sold it to a wholesaler through the Rio Club there, lost 30 grand over what we paid for it in addition to losing money every month. So the lesson there, never buy a property site unseen.
Slocomb Reed:
On that note, Mark, what is your best ever advice?
Mark Hutton:
It's interesting. I've been on both sides of this coin now that we are coaches, but seek out people that are doing what you want to do and emulate them. We learned about the RAL as an asset and as a business, and we fell in love with it. And we signed up for the classes, and we went to the academy. And then we didn't use some of the resources. And that delayed us by months and months and months, and obviously delayed starting the business. So.
Now I'm adamant when new students come through and I get the chance to talk with them, that I make sure that they get all the coaching that they paid for and deserve and help accelerate their progress. So I think finding whether it's assisted living, whether it's apartments, mobile home parks, find an expert, find someone in your Rio club, find someone that is doing what you want to be doing and is willing to help you with that. And that will greatly accelerate your experience.
Slocomb Reed:
Last question, where can people get in touch with you?
Mark Hutton:
People are happy to reach out to me. Mimi's house has a website. That's Mimi's house. RAL.com. Mimi's is M I M I S H O U S E RAL.com. Or they can email me mark at Mimi's house RAL.com. And be happy to talk to them.
Slocomb Reed:
Those links are in the show notes. Mark. Thank you. Best of our listeners. Thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show.
Leave us a five star review and share this episode with a friend you know we can evaluate to through our conversation today. Thank you and have a best ever day. Thank you, Slocum. Appreciate you having me on and look forward to seeing you on November 7th. See you then.
