11 Real Estate Lessons I Learned From Playing Monopoly
Tuesday Sep 03rd, 2019
11 Real Estate Lessons I Learned From Hasbro’s Monopoly:
One of the best ways to reinforce knowledge is through play or entertainment. Learning that doesn’t feel like work? Sign me up!
What better game to learn about real estate than Hasbro’s (formerly Parker Brothers’) classic board game, Monopoly? Whether you prefer its original version or one of the many other derivatives, there remain several core strategies that lend themselves to success both in the game AND in real life. Here are some that stand out in my mind:
1) Buy Rental Properties To Generate Passive Income:
In the game of Monopoly, the goal is to acquire as many properties as possible to render the other participants bankrupt. When one acquires properties, it gives other players the opportunity to land on their spaces and pay rent. If the player chooses to avoid this strategy, their revenue streams will be limited to their salary (passing “GO”) or unpredictable life events (“Chance” and “Community Chest” cards). From a spectator’s point of view, the latter option may not seem like the most effective approach to win the game.
Ironically, it seems that many people who go through life avoid looking for ways to increase their income through secondary sources. For whatever reason - be it fear, uncertainty, bad advice or unpleasant past experiences - they choose to rely on their primary source of income as their only source of income. In order to truly flourish and rise above subsistence, it is of paramount importance to explore other ways to generate cash. Both in the game and in real life, participants will be happier that they did.
2) Leverage Your Properties To Buy More:
While this may seem like an effective strategy for some, it’s probably not for the faint at heart or risk-averse. With this method, adventurous players mortgage (see: refinance) their properties to buy others. The hope is that their opponents land on their newly-acquired properties more frequently, thereby paying off the loan. However, it puts the player at risk should he or she land on a space that requires a hefty rent payment. The player is more susceptible to bankruptcy, but has a greater earning potential over time.
Some real estate investors strategize similarly in the real world. After acquiring one or more of their own properties, they opt to refinance or use equity from their existing properties to acquire new ones. The benefits are obvious: more units to rent equals more money into the investor’s pocket. However, they leave themselves vulnerable to risks in the form of vacancies, market downturns and changes in interest rates.
3) Maintain a healthy emergency fund in case of emergencies:
On the flip side, some players will employ this defensive strategy to prevent rent payments from making dents into their real estate portfolios. Rather than aggressively buying at the expense of their bank account, these players will conserve funds and rely on fewer properties in well-positioned locations (more on that later) to protect themselves against unfavourable dice rolls. Of course, this allows for opponents to scoop up properties that may be valuable later in the game.
In the real world, players do not always start with a healthy emergency fund at the beginning of the “game”. I believe the lesson here is this: don’t start playing until you have enough in the bank to start the game. Many first-time buyers and investors will try to buy real estate without planning and acquiring the funds to do so - as a result, they find themselves under mountains of debt and possibly even bankruptcy. The safer, albeit longer approach, is to save aggressively until one has the funds to acquire properties with as much cash as possible. Even though this may take a while, it is ultimately more secure, with players and investors thanking themselves later on in the “game.”
4) Take Advantage of Opportunities:
The first few rounds of Monopoly may seem like a race to acquire the most properties. Oftentimes, this is the case, but may not necessarily be a bad thing. Properties that you acquire quickly are useful to leverage later against properties you may seek to acquire. Players usually have a decently healthy bank account at the start, which gives them ample opportunity to make some quick purchases. Going first in the dice order definitely helps here!
The parallel here is to take advantage of opportunities that are you truly perceive as opportunities. I am not advocating for the spontaneous purchase of under-researched and poorly-funded property, but it is just as easy to fall into a “paralysis-by-analysis” trap and never invest at all. Not only do your investments constitute an increase in income, they teach you how to handle challenges that arise in a competent way. If you avoid investing to avoid these challenges, you will also avoid the significant financial benefits of long-term property ownership.
5) Improvements on your rental properties increase rental income:
Who says improvements aren’t worth the investment? In Monopoly, this one makes sense: spend money on improvements (houses, hotels, etc.) and your opponents will have to pay exponentially more the next time they land on your property!
In real life, the parallels are similar: rental properties which have been updated to contemporary standards will obtain a higher rental rate than those which are left unkept and neglected. Even rentals in up-and-coming areas have the potential to attract higher rates and better tenants. People will pay for cleanliness and peace of mind. Also worth mentioning is the appreciation value that these improvements will add. A win-win!
6) Trade/Negotiate with other players to establish mutually beneficial scenarios:
Sometimes, other players will have properties in areas of the board that you are seeking to establish “monopolies” in. Sometimes, you will have the properties that others are looking for. Fortunately, the game permits ample room for trades and negotiation - why not take advantage of it? The best approach, in my opinion, is to seek “win-win” scenarios in which both parties perceive benefit. Players are not likely to give up assets without receiving anything in return - it’s up to you to sell it in such a way that would genuinely benefit them. The opposing player then becomes more inclined to provide you with that which you are looking for.
The same usually works in the real world. If somebody has something you seek, it is prudent to offer them something that they value in exchange. If you find that they are not willing to participate, perhaps it is because they are not having their values met and are unwilling to give up something valuable in exchange. Find something that appeals to them — it puts you in a better position to find mutually agreeable solutions.
7) Don’t Spread Yourself Too Thin:
While some players may choose to acquire every property that falls in their paths, others think carefully about the properties they hope to acquire and employ. Having many single properties all over the board may give you a spatial advantage, but does not allow you to improve and exponentially grow your earning potential that is so crucial as the game continues. You do need a “monopoly” to build houses and hotels, after all.
While in reality we are not limited to the purchase of properties located (literally) next door to each other, this metaphor lends itself to acquiring accessible income properties near the investor’s primary residence. In the event that tenants or the property require assistance, landlords can be on hand (or at least within driving distance) to quickly solve the problem and avoid relying on others’ interpretations of events. Property management, while useful in later stages of real estate investing, can be expensive for the casual or beginning investor.
Again — in direct contrast to the previous tip, it is important not to remain too steadfast in your approach to the game. A significant portion of Monopoly is based on luck - rolling the dice and selecting cards, for starters - which can have a major impact on your strategy. Thus, it is important to be flexible. A balanced approach might be to have in mind a primary and two secondary strategies based on perceived rolling patterns, while making minor adjustments as the game progresses.
Some individuals are familiar with the expression advising against putting all of one’s ”eggs” into one single “basket.” Likewise with real estate investing, a diverse portfolio creates balance in an investors approach and protection should a particular segment of the market experience a correction or downturn. Different types of property experience varying market behaviours thereby leaving uniform approaches vulnerable to loss. Flexibility, too, allows investors to handle unexpected surprises with ease (or at least, competence) and ensure that their investments are well taken care of in the long run.
9) Make Luck Benefit You:
As mentioned before, a significant portion of Monopoly is based on luck. While some players may choose to fall victim to a low dice roll or bad card selection, other players look for ways to benefit from their situations. Perhaps a low dice roll allows you to acquire more properties along a single side. Or, a high roll puts you in better position to pass “GO” or avoid rent. Regardless, players always have the ability to manipulate strategy according to the positions they are found in.
Sometimes, it may seem that a bad situation is just that — a bad situation. Under the surface, though, there are likely some - if not many - hidden benefits from the experiences you are experiencing. A tenant complaint may create an opportunity to strengthen rapport, or a minor leak may allow you to finally fix that ongoing issue you’ve been meaning address. With a bit of digging and a slight shift in perspective, the situation can instantly change into your favour.
10) Location, Location, Location:
In the game of Monopoly, location has significant advantages. Experienced players may have noticed that certain locations on the board experience more traffic than others — namely (at risk of revealing one of my own strategies), the properties immediately following the the “Jail” space. Players who are sent here have to leave eventually, and where are they most likely to land within their first 12 board spaces?
I will not expound on the many possible interpretations of geographic location and its benefits to real estate investment here. I will suffice it to say that the location of the property you invest in matters. Potential longevity and profitability are key factors in determining investment location, but personal tastes and preferences are not to be ignored either. Invest as if you plan on owning the property for a long time. Perhaps you will!
11) It’s only a Game:
Lastly, Monopoly provides us humans with a friendly reminder to keep our lives light-hearted and in perspective. If we take the game too seriously, we miss out on one of the key benefits the game has to offer — fun. Being a sore loser can affect relationships with players outside of the game and is so not worth the trouble! The fact that your loss allowed another person to experience the joy of winning can also be rewarding in itself. Plus, there will always be other opportunities — maybe even better ones. Mutual enjoyment is definitely more beneficial for everyone in the long run.
How do you think your life would be if you approached it with the same mindset? Generally speaking, I think it would provide welcome psychological and physiological benefits to you and the people around you (although I confess that I am neither a psychologist, nor a physician). Life always has its wins and losses, but how we choose to interpret them defines our perception of them. By choosing to interpret life through a lens of joy and opportunity, we suddenly begin to see all of the joy and opportunity that was previously hidden right in front of us the whole time.