Rental Fee versus “Buy-In” Communities

Which Choice is Right for You?

One of the most cherished virtues of being an American is the right of “choice.” We like having options, even if we don’t like the choices presented, we like the fact that we have them!

For instance, although I used to like exercising at a younger age, it’s harder now and I don’t like it as much. I have a choice: I can stop exercising and watch the needle on my scales change positions upward, or I can go to the gym and sweat for 45 minutes and keep my weight at the status quo.

Our community is fortunate to have an abundance of choices when it comes to selecting a retirement community. Some communities require a significant entry fee. Others charge on a monthly rental basis. Given the economic climate today, choosing between the two is a big decision that must be considered carefully.

In the 1960’s, retirement communities were built by the hundreds mostly by church-related institutions. While their philosophies varied between the different denominations, most shared one thing in common: in-coming residents paid an entry fee, sometimes in the tens of thousands of dollars, and then were required to pay a monthly service fee.

These communities advertised extensive amenities, activities, services and meals in addition to offering varying plans allowing the resident to move from “independent” living to “assisted” living or “skilled nursing” care. A person who paid an entry fee would pay less as he or she moved through the continuum of care versus one who moved directly into a skilled area without paying the up-front fee. As an added feature, by way of an amortization schedule, the resident’s estate would receive a portion of the entry fee back within the first few years of their initial residency. This entry fee concept was near perfect for the generation at the time and continues to be a viable choice.

Current research continues to show that absence of maintenance, mobility, security, and proximity to family are very important for those living in retirement communities. However, cost and return on investment have become more significant in choosing a retirement community. Even before our economy took a left turn, more and more seniors indicated that they wanted to keep their investments and rent their retirement space as opposed to parting with a large portion of their nest egg in the way of an entrance fee.

As a result, many retirement communities have begun to offer the “no entrance fee” option to their prospects. More and more communities offer ONLY the rental option while  offering the same amenities as the well-established entry fee communities. Rental communities tend to use investors to provide the capital needed to keep a property fresh and updated, whereas entry fee communities tend to use the entry fees to help with capital needs.

To compare further, the retiree paying the entry fee parts with liquid cash and lost income, given they won’t realize interest on the cash representing the entry fee. On the flip side, they will typically pay less for their monthly service fee for having paid an entry fee. The retiree who has chosen a rental retirement community does not experience a large capital outlay and can continue to receive interest and continue to control their untouched investments. Their monthly rent typically will be slightly higher than monthly service fee for the entry fee community.
Again, having choice is good!

Our area is blessed with excellent choices relative to retirement living and now there are more and more options as to how each consumer will afford their retirement living.