Residential Assisted Living Business Plan (STRUCTURE Your RAL Like This)

– Hey, guys, Toby Mathis here and a question I get quite
often, especially for folks that are in the residential
assisted living space is how do you actually
set-up or structure a residential assisted living business? Well first step, is to
define which type of business I’m actually in. Whenever
we look at residential assisted living, there’s
really three areas you can fall into. I’m going to say One, Two, Three. The first area is you could
just be the money person. If your the money person,
then your either participating in a venture by loaning money to the venture. Or as an owner in a private
placement or something where your a passive owner.
So that’s number one. Is we look at this. Number two would be if
your actually running the residential assisted living,
the operating business. And so I am just going
to say, RAL Operation. I’m going to put boxes around
these because it’s really important that we actually
keep them separate. The last one is going
to be the real estate. The real estate is the
actual, physical house where it’s located. Now,
this guy, right over here. The money? Could be funding,
one, or both of those. It really depends and that’s what we… That’s why we have to do some
fact-finding because it’s not a clear cookie cutter.
But what we know for sure is that this is passive. This is not an operator.
This is passive, and if it’s passive, then we do not want
to hurt it on it’s way to your tax return. In other
words we want this to flow right on to your 1040, if it’s you, and we want it to get to you
without making it into active, and the way you do that is by
having either either an LLC, that is disregarded, or
an LLC that is taxed as a partnership, if you
have other members of it. Usually, if it’s husband
and wife, we’re going to try to get it to be disregarded
so we don’t have an extra tax return, and it just goes
straight onto your 1040. But if you do have a partnership,
or you do have, your in a separate property state,
for example, with a spouse. Worst case scenario, is we
are doing it as a partnership which means it files a 1065.
You get a K-1 that goes on your 1040. It stays passive.
That’s all you need to know that it stays passive. If your loaning to these
organizations though your going to want to make sure that your
securing your interest in that money. In other words, make
sure that if you are loaning on real estate that you are
getting a deed of trust or a mortgage against that
property. You may be in second position, but you still want
to make sure that your secured. If your loaning to the
Residential Assisted Living Operation, make sure that your
securing it with something. Even the receivables. Any
equipment they have. Whatever, make sure that you have
something, or get a personal guarantor against the person
that owns it. So let’s say that you have your friends
who are running the Residential Assisted Living
Operating Entity, that you are somehow protecting
yourself. Maybe your taking a guarantee against them, so
that they’re using their house or some other assets of
security. But make sure you are securing that, otherwise you
may be giving your money away. Now when we get to the
Residential Assisted Living Operating Entity, that
is an active business. And if it’s active, then you
are going to be subject to self-employment tax, if
you are the one who is running this. So we want to
make sure that we’re separating it off of the owner, so that
we have an opportunity to do some tax planning with
it. This one is active. I am more likely than not, going
to make it an LLC, or an Inc. And make it an S-Corp for tax purposes. I can have an LLC tax as
an S-Corp, or I can have a corporation tax as an
S-Corp but I am doing this because this type of income
is active and I want to be able to control how much
of that is going to hit me, that is going to be subject
to self-employment tax or, in the case of an S-Corp,
it’s FICA, Social Security, whatever you want to call it, It’s old age death and
survivors and Medicare. It’s 15.3%, if it’s just you. If you’re the employee of an S-Corp,
or the shareholder of the S-Corp, and your paying
yourself as an employee, the company pays half and
you pay half but it still gets up to that 15.3%.
So this is the point that we are looking at, is we
want to make sure that the profits that flow down,
after the salaries are paid, and you take a reasonable
salary, that the profits are not subject to that self-employment
tax or the Social Security Tax. So we use an
S-Corp. Nine times out of ten, the operating entity is
going to be an S-Corp. Now we get to the Real Estate. Real Estate activities are
considered passive. If you are owning the Real Estate
than this is passive. If it’s passive, it’s just
like over here. We do not want to turn it into active
income. So we want to make sure that it flows down, to
you, onto your 1040. It’s going to go on your
Schedule-E no matter what. If it’s going to go onto your first page, this is where your real
estate ends. It’s because you own it and its your disregarded LLC. Same situation as over here
or if it’s flowing down via a K-1, then it could
be a 1065 and it’s flowing onto your page two. It’s
going to flow down as passive income, your going to get
depreciation on that property. You are going to be treating
this as a rental property, which means this company
here has to pay rent to it. And that’s why this guy
over here, if you are the money person, you could
be providing money to the real estate, you could
be providing money to the Residential Assisted
Living Operating Entity, or you could just actually
own the real estate, or you could actually just be
the owner of the Residential Assisted Living, cause
there’s really three areas. If, for example, your the
money person for your own business and you don’t need
anybody else and you say ‘Hey I’m the one funding
everything’, you may just go ahead and buy the real
estate and lease it to your own operating entity. I
would encourage you, 100% to make sure those two things
are separate. Now if you go to the SBA, or some of these
other organizations for a loan they may try to lump you
all together, and resist it. You can treat it as one
endeavor, and you can still be a guarantor on it if it’s an
SBA loan, you are going to be personally guaranteeing
that no matter what. It’s called a recourse loan. But if that’s you, you want
to still make sure that those things are separated out. I can’t even emphasize how
important that is, because this operation could fail,
you don’t want it to take your Real Estate with you.
This Real Estate could have a horrible liability
occurrence that occurs on it. You don’t want it to take away
your successful operations. This operating entity could
be managing three or four or five or six different
locations, and it might be have other business. And so
you want to make sure that those things are separate.
It’s really critical. And especially if you have somebody else who’s an operator and all
you are doing is providing the Real Estate. Now this is
different type of Real Estate in some cases we’re seeing
twelve person homes that all have their own attached
bathroom, and the builder is being very precise and
saying this is the type of activity we are doing, and by the way, Residential Assisted Living,
you see these things go really huge, like there
could be 200 bed facilities. We’re not looking at that.
We are really looking at the residential side, so typically,
depending on your state, your going to be below
16, probably less than 12, most of the time I’m seeing
them, they are in the eight to, excuse me,
the six to eight range, you know, that’s the size.
Probably closer to the six and somebody owns a piece
of property that would not normally be able to be
leased, but their using it in the Residential Assisted
Living Field. And they have somebody coming in there
and providing activities of daily living, like making
sure everybody is fed. Cleaning it, you know,
making sure that the house is clean, doing their laundry,
and all that stuff. It’s like a, it’s like
a club at that point. That’s what their really
paying for and somebody to watch over them and make
sure that they have company. If it’s, you know, quite
often it’s somebody who has lost a spouse, or it’s
two spouses that just don’t want to keep maintaining
the house, or it takes too much energy, or frankly,
they just want to have a really good time. Like
they don’t want to have to worry about those things and
that’s causing them stress. And so they move into an
Assisted Living Facility where it’s people who are
able to cohabitate all together in a house and you have services being
provided. And again, three different categories. I can’t emphasize it enough.
Whenever you are going into this area, and it is
a booming area, and it’s growing because of the baby
boomers, no pun intended on that booming thing. But
it is an area of growth, and a lot of people are
starting to enter that space. Make sure you are separating
out your activities and you know where you are landing. If you are in one only than you want to be looking
at it differently, than if you were in third category only. If you are doing both, or
all three, then you can still separate them out
to make sure that you are protecting yourself as much as possible. Even if you are providing
the funding to a piece of property that is being used
here. You could have the loan going here, and secured,
so if anything bad happens, you get paid back first. You
still document it that way. That’s the appropriate way
to run a Residential Assisted Living Business. Thank You!

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3 thoughts on “Residential Assisted Living Business Plan (STRUCTURE Your RAL Like This)

  1. Resource Article:
    🏡 Creating A Solid Residential Assisted Living Business Plan

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