SBA Financing for a 6-Bed RCFE: How Much Cash Does a Buyer Really Need?

One of the most common questions I receive from buyers interested in acquiring a 6-bed Residential Care Facility for the Elderly (RCFE) is:

“How much cash do I actually need to purchase the real estate and the RCFE business?”

Many prospective buyers assume they will need 25%, 30% or even more as a down payment when purchasing both an assisted living property and its operating business.

For a qualified borrower and a transaction that meets lender underwriting requirements, SBA-backed financing may allow the real estate and RCFE business to be acquired together with a substantially lower equity investment.

Let's look at an example based on a $1,550,000 total RCFE acquisition.

Example: $1.55 Million RCFE Property & Business Acquisition

Assume a 6-bed RCFE is being offered as a combined real estate and business acquisition:

Real Estate: $1,375,000
RCFE Business: $175,000
Total Acquisition Price: $1,550,000

For illustrative purposes, we'll assume:

• 8.00% interest rate
• 25-year amortization
• 12%–14% buyer equity injection
• Approximately 3% of the purchase price budgeted for closing costs
• Qualified borrower and qualifying business

The actual financing structure will depend on the buyer, property, business financials, appraisal, lender underwriting and other factors.

Scenario #1: 12% Buyer Equity Injection

On a $1,550,000 acquisition:

12% Equity Injection: $186,000

That would result in an illustrative financed amount of approximately:

$1,364,000

At an assumed 8.00% interest rate amortized over 25 years, estimated principal and interest would be approximately:

$10,526 per month

Estimated annual principal and interest would be approximately:

$126,300 per year

Now let's consider closing costs.

Using approximately 3% of the purchase price as a conservative planning assumption:

Estimated Closing Costs: $46,500

Estimated Cash to Close

Equity Injection: $186,000
Estimated Closing Costs: $46,500

Estimated Total Cash Requirement: $232,500

That represents approximately 15% of the total $1.55 million acquisition price when the equity injection and estimated closing costs are combined.

Scenario #2: 14% Buyer Equity Injection

Now assume the lender requires a slightly larger equity contribution.

14% Equity Injection: $217,000

Estimated financed amount:

$1,333,000

At an assumed 8.00% interest rate amortized over 25 years, estimated principal and interest would be approximately:

$10,287 per month

Estimated annual principal and interest would be approximately:

$123,450 per year

Using the same estimated 3% for closing costs:

Estimated Closing Costs: $46,500

Estimated Cash to Close

Equity Injection: $217,000
Estimated Closing Costs: $46,500

Estimated Total Cash Requirement: $263,500

That represents approximately 17% of the total acquisition price.

What Does This Mean for an RCFE Buyer?

A qualified buyer looking at a $1.55 million RCFE property and business acquisition might therefore plan for approximately:

$232,500 to $263,500 in cash to close, based on these assumptions.

That is a significant distinction.

Instead of assuming that purchasing a $1.55 million RCFE requires $400,000, $500,000 or more in cash, an appropriately structured transaction may potentially allow a qualified buyer to acquire both the real estate and operating RCFE business with considerably less initial capital.

Buyers should also maintain adequate liquidity and working capital following the acquisition. The amount of cash required by a lender may therefore be greater than simply the down payment and closing costs illustrated above.

Why the RCFE's Cash Flow Is So Important

The amount of money a buyer can borrow isn't determined solely by the value of the house.

When financing an operating RCFE, lenders can evaluate the entire acquisition and its ability to support the proposed debt.

That can include:

• Historical business revenue
• Resident census
• Resident rates
• Payroll and operating expenses
• Business profitability and cash flow
• Property value and appraisal
• Buyer's experience and qualifications
• Available liquidity
• Creditworthiness
• Debt-service coverage
• Licensing and operational considerations

For a 6-bed RCFE, resident rates can have an enormous impact on the economics of an acquisition.

Six residents averaging $5,000 per month represent approximately $360,000 in annual gross revenue.

At $6,000 per resident, gross revenue increases to approximately $432,000 annually.

At $7,000 per resident, potential gross revenue reaches approximately $504,000 annually.

This is why an RCFE should be analyzed as both a real estate investment and an operating assisted living business.

RCFE Financing Is Only Part of the Transaction

Obtaining financing is important, but it is only one component of successfully acquiring an RCFE.

The buyer also needs to evaluate the real estate, business financials, resident census, resident rates, staffing, licensing, fire clearance, facility improvements, regulatory requirements and transition of the operating business.

The purchase agreement must also be structured around the unique circumstances involved when an operating RCFE business and the underlying real estate are being purchased simultaneously.

This is very different from purchasing a conventional residential property.

Looking to Purchase a 6-Bed RCFE in California?

I specialize in the sale and acquisition of RCFE properties and assisted living businesses throughout California.

I work with buyers from the initial search and financial analysis through financing, due diligence, transaction structure, licensing considerations and closing.

I also have relationships with experienced lenders who understand the 6-bed RCFE business model and how to evaluate transactions involving both the real estate and operating assisted living business.

I currently represent RCFE opportunities where qualified buyers may be able to explore financing structures similar to the example above.

If you are considering purchasing an RCFE and want to understand how much you may qualify for, how much cash you may need, and how to properly structure the acquisition, contact Matthew Hustad and The Hustad Group for available RCFE opportunities and buyer representation throughout California.

The financing scenarios above are provided solely for informational and illustrative purposes and do not constitute a commitment to lend, an offer of financing or a representation that a particular borrower, business or property will qualify. Rates, equity requirements, closing costs, fees, amortization, working-capital requirements and underwriting standards vary by lender and transaction.