Real Talk Real Estate: Nightmare Deals | Assisted Living Facility From Hell - Episode 20
Podcast Title: The David Greene Show
Host: David Greene
Guest: Keith Folarski
Release Date: November 19, 2024
Introduction
In Episode 20 of Real Talk Real Estate, host David Greene delves into the tumultuous experience of investing in assisted living facilities with his guest, Keith Folarski. This episode is part of David's ongoing "Nightmare Deals" series, where he explores real-life scenarios where real estate investments did not go as planned. Keith shares his firsthand account of investing in assisted living facilities, the challenges he faced, and the lessons learned to help listeners avoid similar pitfalls.
Meet Keith Folarski
Keith Folarski, a 35-year-old civil engineer from Wisconsin, balances his demanding career at a nuclear power plant with a decade-long venture into real estate investing. Together with his wife, Keith manages 11 buildings comprising approximately 33 units under Sky Properties 2020. Despite not having equity partners, Keith has navigated numerous deals, although he's not without experience, having moved beyond the rookie stage.
Quote:
“I’ve been doing this for over 10 years. I’ve seen the ups, the downs, and everything in between.”
— Keith Folarski [01:26]
The Assisted Living Facility Investment
Keith's foray into assisted living facilities was not a calculated pursuit but rather a serendipitous opportunity. After deciding to exit a 112-acre farm venture through a 1031 exchange, Keith was introduced to two assisted living facilities by a seasoned agent.
Quote:
“This kind of makes sense. And I love the idea because, like or not, these facilities are needed everywhere and they’re always full from what I’ve heard.”
— Keith Folarski [03:45]
Understanding Assisted Living Facilities: David Greene provides a comprehensive overview of assisted living facilities, highlighting their role in providing housing and care for the elderly or disabled. These facilities come with stringent regulations, including ADA compliance, and typically operate under a triple net lease model where operators handle taxes, insurance, and utilities, paying rent to the property owner.
Quote:
“These were duplexes when they were originally built, like side by side duplexes tore the center wall out and made one giant unit. So ADA compliance was really important.”
— Keith Folarski [05:48]
The Deal Structure and Initial Optimism
Keith acquired both facilities simultaneously through a single purchase agreement for $920,000. The terms included a 10% down payment, a 10% seller carry, and an 80% loan-to-value (LTV) from the bank at an advantageous rate of 6.5%, significantly lower than the market rate of 8% at the time.
Quote:
“The numbers were pretty good. I didn’t have enough money to put 20% down with my farm sale.”
— Keith Folarski [08:00]
He anticipated a combined monthly cash flow of $1,600, translating to an impressive 21.3% cash-on-cash return on his $90,000 investment.
Unforeseen Challenges: License Transfers and Management Issues
Shortly after the purchase, complications arose. One facility was already operational, while the other was in the process of obtaining a license. Keith discovered that the operators of these facilities were unethical, leading to license issues and strained relationships.
Quote:
“I thought I would make just about $1,600 a month cash flow... I was going in pretty happy.”
— Keith Folarski [10:13]
A pivotal moment occurred when the Department of Health Services (DHS) intervened, questioning the ethics of the current operators. This led Keith to apply for the license himself, transforming his role from a passive landlord to an active operator responsible for managing the facility.
Quote:
“I went from a triple net to like a big business. We bought a E350 wheelchair van because we’re responsible for all the transportation.”
— Keith Folarski [18:30]
Financial Strain and Operational Struggles
Keith’s optimism was quickly overshadowed by financial strain. The initial cash flow projections were disrupted by late payments from the operators, escalating maintenance costs, and the additional burdens of managing an assisted living facility without prior experience.
Quote:
“Technically, month to month, yeah. So that facility number one, all of our funding comes from Medicare Medicaid and we bill out like 45 grand a month.”
— Keith Folarski [23:02]
The second facility remained vacant, resulting in significant loss of rent and exacerbating the financial pressure. Collecting rent and managing operations without reliable operators proved untenable, leading to a cumulative loss of nearly $90,000 over 12 months.
Personal and Emotional Toll
Balancing a full-time job with the unexpected responsibilities of running an assisted living facility took a massive personal toll on Keith. The stress culminated in sleep disturbances and strained relationships, highlighting the often-overlooked emotional challenges of real estate investing.
Quote:
“I don’t know what I’m going to do because every month for like over half a year, I’m just bleeding money.”
— Keith Folarski [25:04]
David Greene empathizes, drawing parallels to his own experiences with stressful real estate deals and emphasizing the mental health risks associated with high-stakes investments.
Turning the Tide: Stabilization Efforts
Despite the setbacks, Keith and his team, including the adept administrator Angela, worked diligently to stabilize the facilities. Facility one began to see improvement with a stable resident count and streamlined operations. However, facility two remained a work in progress, with expectations of stabilization within six months.
Quote:
“Facility one is pretty much stabilized. We have seven residents, and we got our seven staff that can run that facility.”
— Keith Folarski [35:56]
Lessons Learned and Advice for Investors
Keith offers invaluable advice to fellow investors considering similar ventures:
- Maintain Adequate Cash Reserves: Ensure you have sufficient funds to weather unexpected financial strains.
- Limit Leverage: High leverage can amplify both gains and losses. Conservative financing may offer more stability.
- Thorough Due Diligence: Deeply understand the operational demands and regulatory landscape of assisted living facilities before investing.
- Prepare for Active Management: Unlike passive investments, assisted living facilities require hands-on involvement and expertise.
Quote:
“I should have had more cash reserves. If you’re going to go into a new venture, especially something you don’t know, I should have had more money and probably less leverage.”
— Keith Folarski [37:55]
Conclusion and Contact Information
The episode concludes with Keith expressing a path toward recovery and stability, despite ongoing challenges. David Greene encourages listeners to learn from Keith’s experiences and approach real estate investments with caution and preparedness.
Contact Keith Folarski:
For those interested in connecting with Keith or learning more about his journey, you can follow him on Instagram @SkyProperties2020 or reach out via Sky Properties 2020, focusing on investments in Minnesota and Wisconsin.
Final Thoughts:
David Greene wraps up the episode by acknowledging the shared struggles within the real estate community, fostering a sense of camaraderie among investors facing similar challenges.
Notable Quotes Highlighted:
- “I’ve seen the ups, the downs, and everything in between.” — Keith Folarski [01:26]
- “This kind of makes sense... always full from what I’ve heard.” — Keith Folarski [03:45]
- “We have seven residents, and we got our seven staff that can run that facility.” — Keith Folarski [35:56]
- “I should have had more cash reserves...” — Keith Folarski [37:55]
This episode serves as a cautionary tale for real estate investors considering assisted living facilities, emphasizing the importance of thorough research, financial preparedness, and the readiness to transition from passive investment to active management.