It’s little wonder that so many older Americans are choosing to spend their later years in a retirement village. These communities afford the opportunity to regularly socialize with peers, engage in a host of recreational activities and, in many cases, take advantage of on-site medical care. 

Increasingly, these villages are becoming popular with investors, too. While some see an opportunity to benefit from appreciation over time, many are in it for the rental income.

Typically, retirement communities require residents to be 55 or older, but that doesn’t always apply to owners. As a result, some "underage" buyers are snatching up houses and condos without the intention of moving in – at least, not anytime soon.

Retirement Villages – A Good Investment?

With the Baby Boomer generation getting older, some investors see this as the perfect time to enter the market.

There are now more than 75 million Boomers in the U.S., according to the Pew Research Center, which means they represent about a quarter of the population. With the oldest Boomers just hitting age 70, all signs indicate demand for senior housing will only go up in the decade ahead.

According to the National Investment Center for Seniors Housing & Care (NIC), this segment has already been outpacing the rest of the housing market. The NIC reported that between 2005 and 2015, senior housing provided a 14.2% return for investors – a combination of rising home values and income returns – while a broader index of apartments yielded just over 8%. 

In some communities, demand has so outpaced supply that would-be buyers have to put their names into a lottery and hope for the best. 

That doesn’t mean that senior villages, sometimes referred to as “active-adult communities,” are fool-proof investments. During the Great Recession, communities in states like Florida and Nevada took some of the sharpest hits in the real estate sector.

Living in one of these communities, as opposed to an assisted living or skilled nursing facility, is a choice rather than a necessity. That means when the economy hits a rough patch, demand has the potential to tumble.

Factors to Consider Before You Buy

Not all active-adult communities are organized the same way. In order to determine whether the one you're considering is a good investment, you need to look at each village on its own merits.

Here are some of the factors to look out for:

1. Make sure renting is allowed. This one’s pretty basic. Some communities will allow owners to rent out the property, but others won’t. If the idea is to generate an income stream from tenants, you know which kind you need to be in. 

2. Get a feel for the place. Find out what sorts of amenities the community has compared to others in the area. Is it close to shopping attractions or the beach? Does it offer transportation to those who don't drive? What about classes or visits from doctors? Potential tenants will be looking at these same things when deciding where to move. 

3. Determine its real value. To get a better sense of what a particular property is worth, do some localized research. If you can find assessment data through the homeowners’ association, for example, it can be a gold mine. You’ll also want to look into foreclosure information for the village; if the number is significant, it’s likely to depress home values. 

4. Evaluate its condition. Whenever you’re buying a home, it’s important to evaluate the building and its systems, such as heating or central air. That also goes for the community as a whole. Are the roads in good shape? What about the roof on a condo building? Often, the only way to repair those things is with a hefty assessment that could carve into your bottom line.

Keep in mind, too, that there’s always a risk associated with owning a small number of properties – or perhaps just one – especially when they’re all in the same active adult community. If you don’t have the stomach for short-term risk, a more conservative asset might be your best bet.

The Bottom Line

Demographic trends suggest that the outlook for retirement communities is bright. But that doesn’t mean an economic downturn couldn’t change your fortunes. Make sure you know your appetite for risk before jumping on this bandwagon.