While most people use spreadsheets and numbers to evaluate their properties, there are other methods that are worth looking at, too. A new aspect of our rental property Portfolio Analysis service is incorporating a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis. Using a SWOT analysis to evaluate real estate is a great way to get a holistic view of your property.
Anyone who’s spent time in business school has probably used this analysis to evaluate deals, but it can also be utilized to give you a new perspective on your property. To understand what it looks like, we’re going to walk through a SWOT analysis I recently did for a client who owns a fourplex in Loveland, CO. To get a better understanding of the property and his situation, check out the July 14th episode of Drinks and Deep Dives or read the Portfolio Analysis: Fourplexes in Loveland – Raise Rents or Leverage Up? blog post.
- Listen to the podcast “#309: Using a SWOT Analysis to Evaluate a Loveland Fourplex” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
What is a SWOT Analysis for Real Estate Investing?
The above image shows real estate oriented examples for each part of a SWOT analysis. We’ve seen during covid that space has become a huge asset, so having a smaller unit could be a weakness. Opportunity could come in the form of Transit Oriented Development, or TOD, a popular development concept of creating walkable communities around light rail systems. The difference between low rents (weaknesses) and flat rents (threats) is that flat rents are the result of a location that isn’t growing, doesn’t have good amenities, or otherwise show no indicators that rent is going to change.
Strengths and weaknesses are internal to the property itself, while opportunities and threats concern external developments. For example, a roof that’s about to collapse relates to the property, so it is a weakness. Alternatively, a poorly performing school district is categorized as a threat.
By laying out all of the information of the property, we can easily identify some of the SWOT components. All of the units in the fourplex have two bedrooms, so that would be considered a strength. The amount my client is getting in rental revenue is under market rates, making it a weakness. Having roughly $450K in equity is an opportunity, while the low cap rate of 3.3% is a threat.
How do I apply SWOT metrics to my property?
We can go further by creating a whole set of metrics for each of the four sections. For each individual metric, assign a rating on a scale of 1 to 5. Then, take the average for each section to determine the overall score for a category. If something is not relevant to the property, eliminate it from the list rather than giving it a score. These is no set number of how many and what types of metrics you can use; you can replace or eliminate them based on what’s relevant for your property. Keep in mind that these scores, while based in reality, are subjective.
For the fourplex, the strongest section is opportunities because it has the highest score. This tells us that’s where we should focus: look into increasing rents, find out more about the new development, or potentially convert the property into Section 8 housing. If threats had been the highest scoring section, it would mean that there were quite a few threats coming into the area and that would be cause for concern. On the other hand, had strengths been the highest scoring section, then that would mean the property was performing well and could likely be kept as is.
What resources can I use to benchmark my SWOT analysis?
While a SWOT analysis consists of largely subjective measurements, there are ways to evaluate it based on actual data. Use Walk Score to get breakdown on how accessible your property is to services. After putting in the address, you’ll get a score of how walkable, bikeable, and close to public transit it is, as well as an overview of what type of businesses and amenities are nearby. To get a better idea of local rents, you can look at Facebook Marketplace and see a map of what people are charging in and around the area of your property. While Zillow or apartments.com are popular for checking rents, they don’t allow you to see the immediate area of your property in the way that Facebook Marketplace does.
Perhaps the most underutilized resource is the publicly available comprehensive plan. This plan is created by cities and counties to determine where and what type of development the locality is planning. They are detailed and objective documents written by urban planners to outline current and future growth, as well as development goals and strategies.
How a Comprehensive Plan Helps You Evaluate Your Property
This is a section of the comprehensive plan for Loveland that concerns the immediate area near my client’s fourplex. The orange section shows where medium/high density residential areas are, which is of interest to my client since he owns a multi family property. The red area is regional activity centers, such as shopping. We can see that there’s a lot of activity going on by the highway, which may be where he should focus on investing.
Using this information, you can see if the growth fits in with what you are looking for, such as employment hubs and shopping that will bolster your property. Conversely, you can also determine if this growth will be a threat, such as more multi family units that could be competition.
After reviewing the plan, we can create a summary that details the type of growth happening and how that could potentially affect a property.
Here is another example of a comprehensive plan:
These maps show the Elyria-Swansea neighborhood in north Denver, perhaps better known as the area around the Purina factory. This is an up-and-coming area with a strong focus on TOD. Since most of the comprehensive plans were written 5-10 years ago, much of the development is well underway. Reviewing the plans and then looking at the current progress can give you an idea of what’s happening in and around a neighborhood.
What does it all mean?
Looking at this fourplex using a SWOT analysis, my client has a better idea of the state of his property and some of his options going forward. He sees that he should either sell it and take advantage of his equity, or try to raise rents.
Since the neighboring properties are in better shape, he may need to remodel the property before trying to increase rent. He can see that there’s not much future development or TOD in the area, but the tenants have been there for a long time with little turnover.
A SWOT analysis is a great exercise for real estate investors to do every year or so since it forces you to quantify some of the things you may think about but don’t expound on. By taking some time to lay out all of the positives and negatives of a property, you can better contextualize where you are and potentially change your decisions going forward.
Now that we’ve incorporated SWOT analysis into the portfolio analysis process, we have an extra piece we can use to evaluate our clients’ portfolios. If you have questions about your portfolio or want us to run through it, reach out to me or fill out the consultation form on our website.
Rental Property Portfolio Analysis Service
- Should I pay off, sell, or refinance my properties?
- Should I utilize a 1031 exchange or take cash off the table?
- The market is hot. Should I sell my properties?
- Should I sell my residential to buy commercial properties?
- Am I on track to achieve my retirement cashflow goals?