Real estate investing is a game for the grown-ups and for those who want to diversify their investments. If you’re tired of keeping all your eggs in one basket, then, take the plunge and explore all the deep waters of real estate investing. But first, you may want to find out what it means to become a real estate investor and return here to read more on how to do a SWOT analysis for real estate projects. Since real estate is among the most valuable assets on the planet, you don’t want to make mistakes. Lenders also want to deal with investors who have done their homework and don’t just test the waters and ask random questions using real estate terms they’ve just learned.

The importance of SWOT analysis in real estate is not widely acknowledged despite the fact that it could spare many investors the pain of their poor decisions. Most real estate investors rely on the Real Estate Pro Forma which is focused on the overall profitability. But a SWOT analysis is not rocket science. It’s good to know how to do a SWOT analysis right before you sign for a mortgage. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Traditionally, you have to draw a square, divide it into four, and place each word in a square. But this is not all. Four SWOT analysis questions demand an answer along the way:
- How to use the Strengths to take advantage of these Opportunities?
- How to overcome the Weaknesses by taking advantage of these Opportunities?
- How to use our Strengths to eliminate these Threats?
- How to overcome the Weaknesses that will lead to the concretization of these Threats?

Now, if you haven’t purchased your first home yet, the following idea might appeal to you. Why not buy a duplex or a fourplex as your first home? Use your good credit score to get the most out of the banking system! If you’re going to pay 30 years for a property, why not buy a larger home than you’d actually need and rent the remaining units?

To make it even easier for you, let’s work on some real numbers. We’ve just found a duplex listed in Austin, Texas. We chose this city because it’s one of the best US cities to live in. Austin carries the name of the “Father of Texas” - Stephan Austin - and has been incorporated since 1839. Now it has a population of more than 950,000 people with a median household income of $73,493 (in 2017), according to Forbes.

This duplex that we have randomly picked is located on the corner of a street, in the Brentwood neighborhood, has 6 bedrooms, 4 full bathrooms, and 2 half bathrooms, the house has a gross living area of 2,864 sq. ft. and the lot is 8,886 sq. ft. This property is within walking distance from 6 schools, grocery shops, and restaurants. Parking is not a problem either, the duplex featuring two large garages. The listing price is $775,000 and let’s assume that our annual salary is $100,000 ($8,333/month). Although we might qualify for many different types of loans, for this example we opt for a 30-year fixed conventional loan with a 20% down payment, which takes out of our pockets $155,000. So, the loan-to-value ratio is 80%, $620,000 to be more exact. The total cost of the loan is $1,000,000, which means that by the end of the term we will have paid $380,000 as interest. But, the monthly payments are quite reasonable: only $2,777. Guess what! We could rent the other half for $2,200 a month (the average rent in Austin, TX, according to RentCafe®).

Another fact worth taking into consideration, though, is the high property tax. Texas is among the states where property taxes are a burden for homeowners, with an average tax rate of 1.973%. So, for our duplex, it would be $15,291 a year or $1,274 per month. Home insurance is also pricey in Texas. For this kind of property, we would have to pay about $160 per month. So, the housing cost rises at $4,211. We will start our SWOT analysis in a minute, but first, let’s make all these numbers more accessible.

Type of property: duplex in Austin, TX
Gross living area: 2,864 sq. ft.
Lot: 8,886 sq. ft.
Price: $775,000
20% down payment: $155,000
LTV: 80%
Monthly payment: $2,777/month
Property tax: $1,274/month
Homeowners insurance: $160/month
Monthly rent: $2,200/unit

Before we move on, we just want to point out that, in this case, renting from yourself is cheaper than the monthly payment. Isn’t it amazing? As long as the second unit is rented, your monthly payments on your mortgage are actually $2,200, and during the vacancy periods, the difference is only $577 - quite small, actually.

The importance of SWOT analysis before buying a property

We borrow the SWOT analysis from traditional business practices because we have to treat real estate investments as businesses. I hope you agree. So, why would someone perform a SWOT analysis before a real estate investment? To find out what are the weak points. If they outbalance the strong points, then it’s better to look for a different property. But strengths and weaknesses are only half of the equation. To get the whole picture, we must analyze the opportunities and threats. Real estate investments are risky. All investors hate risks and try to alleviate them. So, it’s wise to be cautious before betting all your money on a property.

Now that you’ve understood the importance of SWOT analysis, let’s move on and see if our property is a good investment or not. Keep in mind though, that we will use half of that duplex as our primary residence. We are tenants, as well, but the difference is that we pay ourselves, we pay for our mortgage, instead of paying someone else’s mortgage.

How to do a SWOT analysis?

Let’s return to our property and find its strengths and weaknesses. At first sight, this duplex seems quite interesting, but we are not sure whether it would make a good investment.

What are the STRENGTHS of this potential real estate investment?

- Located on the corner of a street.
- A large lot that might allow for expansion
- Proximity to schools, grocery stores, and restaurants
- Has a fireplace
- Debt Coverage Ratio (DCR) - the ratio between a property’s Net Operating Income (NOI) and its Annual Debt Service. Assuming that the duplex generates $4,400 every month, this means an NOI of $52,800. The annual debt is $33,324. Consequently, the DCR is 1.58. A rule of thumb in real estate is to choose properties with a DCR of at least 1.2. A DCR of 1 means that you barely cover your mortgage costs from your rental incomes.
- Capitalization Rate (CR) - it is the ratio between the Net Operating Income (NOI) and the value of the property. In our case, the capitalization rate is 6.8%. Most investors would aim for properties with a CR of 8-10%, but considering that half of it is going to be our own home, this is more than reasonable.
- Positive cash flow - this property is very likely to generate money every month for a long time.
The duplex is located in a good school district, so our property could be preferred by families with children.

What are the WEAKNESSES of this property?

- It breaks the 1% rule - Another rule of thumb in real estate investments is to buy properties that rent for at least 1% of their appraised value. In this case, the whole property doesn’t rent for $7,750 a month.
Solution: let’s not forget that we have land left that could be used to build another house. If we build a 900 sq. ft. home to be rented to an elderly couple, we could cash in $1,400 every month. Or, we could rent it through Airbnb, as well. Of course, we will need a construction loan or a home equity loan to build that little house.
- Three bedroom units are harder to rent than two-bedroom units but are still better than studios, which have a more transient tenant base.
Solution: we will work with a local real estate agent who can minimize the vacancy periods and find decent tenants that won’t cause us trouble.
The property tax is extremely high and there’s little we can do about it.

OPPORTUNITIES that come with owning a duplex

- We have already mentioned the opportunity to use the remaining land to build another rental property.
- Business opportunity - since the house is located on the corner of a street, we could build a small commercial space that could serve as a boutique, a hair salon, a great fast-food restaurant, or - why not? - a real estate office. Renting to a business will generate more rental income, which is exactly what we want.
- Renting through Airbnb - although there are 92 people who rent through this online platform from the same neighborhood. This tough competition could also be considered a threat. Rent prices are about $100 per night for four guests, so with an occupancy rate of 50%, we would make only $18,250, way less than the $26,400 obtained from renting long-term. The vacancy rate should not exceed 28% in order to achieve the same income from the second unit.
- The value of the property could increase over time - you gain capital without working for it.
- Living in one of America’s best cities provides plenty of opportunities in itself.
- Plenty of jobs - unemployment in Austin was only 2.6% in may 2018 and has been steadily decreasing over the past 10 years, according to the Austin Chamber of Commerce.
There are about 180,000 students in Austin, so our chance to find tenants increases considerably.

Facing the THREATS of a real estate investment

- Vacancy risks - it’s a normal risk that most real estate investors have to face and deal with.
- Not a very safe area. We might suffer losses after burglary or acts of vandalism.
- Hidden structural problems
- Depreciation - the property might lose its value depending on the market fluctuations. There is no guarantee that a property will increase in price over the years.
- Troublesome tenants - your neighbors might be noisy or disrespectful, causing a lot of damage to your furniture or home appliances.

We have just proven the importance of SWOT analysis. Once you do a SWOT analysis for a real estate project, you will start with it every time! So, is this duplex a good investment according to this SWOT analysis? YES!

As you could see, strengths and weaknesses are more objective in nature, while opportunities and threats are more subjective. We feel that the strengths and opportunities outweigh the weaknesses and threats, so we would say “YES!” to the duplex! We have decided to use an example with real numbers so that you understand this process as clearly as possible. It’s easier than it sounds, isn’t it? So all you have to do now is to find a real estate agent on the Official Real Estate Agent Directory® and explore his/her listings applying what you’ve just learned. Let us know if this article was helpful in the comments below!

Author's Bio: is the Official Real Estate Agent Directory® connecting homebuyers with home sellers across the USA.