Monopoly has been a classic board game for over a century. It’s a real estate trading game played for fun… and for a chance to be a real estate tycoon. The game rules are interesting as there are some valuable lessons all investors can learn to win at the game of property investing.
I’ve played Monopoly at least a couple of hundred times, since I was a kid. As much as the game annoys me with the fact that I can’t borrow to buy property, I’m still hooked on the thrill of accumulating real estate and collecting rents. These days I get the same thrill from playing the property game in real life. It’s fun..!!
In my daily work, I see some common mistakes people make when it comes to property investing. Given that most people have played Monopoly at least once in their life, I thought it made sense to use some of the key principles from the game to real life property investing.
Here are the 5 key rules from Monopoly that (I think) correlate to property investing today:
Those who win at Monopoly usually own properties (sites) with the highest probability of other players landing on them, which entitles the property owner to collect rent. For example, the statistics say that 7 is the most common number rolled with two dice, and the ‘just visiting jail’ is a common space landed on. Therefore owning the Orange sites is a smart move seeing they are located 6 and 9 spaces from the ‘just visiting jail’ landing.
When investing in property it’s not just about buying in the right suburb, but also about buying the right position where the property (site) sits. If you buy a property in the right street, on the right side of the road, with the right orientation, the property will be in constant demand by buyers and by tenants, no matter what the market is doing.
2. Cash is King
In the game of Monopoly cash is king. To win the game, you have to be the last player standing. In other words, the last player to have money wins. If you are moving around the board buying up everything, when it comes to paying out other players for landing on their sites, and you run out of cash, you lose.
Property investing is just like any other business, where cash flow is king. Maintaining a cash (financial) buffer is fundamental to ensure you can ride the ups and downs that comes with property investing. For example, a property will require repairs and maintenance from time to time, and having the cash readily available is important to upkeep the property.
3. Be patient
To win at Monopoly you have to be patient and have a game plan. Buying every piece of real estate you land on is not strategic and will likely cost you the game as you will run out of money.
The world’s most successful investor of our time, Warrant Buffet, once said “wealth is the transfer from the impatient to the patient”. This is so relevant when it comes to wealth through property. Buying the right properties and being patient (holding) is the secret to creating (massive) wealth through property investing. I see too many people trying to time the market. To make serious money from property investing, it’s about ‘time’ in the market and not ‘timing the market’.
To increase your chance of winning at Monopoly, you need to spread yourself throughout the board as opposed to owning just the one property and loading it up with hotels.
If you bet everything on one property type in the one location (e.g. apartments in the same suburb), you become single point sensitive when the market changes appetite. This is happening right now with apartments in Melbourne, Sydney and Brisbane, where an over supply of apartments has impacted the capital growth of such properties (at least for the short to medium term until demand meets supply once again!).
5. Cash flow
Monopoly is a simple game. You start off with some money, and your goal is to be the last player standing with money. The way you win in Monopoly is by collecting rents on property, or cash flow. On the Monopoly board, the best cash flow are the four railroads, because if you own all four of them, you collect $200 in rent (…a 25% return).
Capital growth is key to creating wealth through property investing. No arguments about that. However, if you don’t manage your cash flow to ensure you remain in the game, then you’ll be forced to sell up your property asset/s and deny yourself the chance to create real wealth from holding your properties for the long term.
Monopoly shouldn’t be taken as gospel, as the rules certainly have their flaws. The fact that you can’t gear and borrow money is a real flaw in my opinion. In real life, if you don’t take on good debt, you’ll never achieve true financial freedom.
Having said that, Monopoly does have some valuable lessons to teach us… Buy well positioned properties, maintain a financial buffer, be patient, diversify property types, and manage your cash flow. These are all very important fundamentals to ensure you win as a property investor.
Disclaimer: This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and seek specialist advice from a suitably qualified and licensed advisor.