It’s only a game. But it’s a game about investing in real estate and it can teach us a lot real estate investing. Most of us have played Monopoly so we know the fundamental truths about the game. Many of the truths about the game are also true about real estate investing.
1) Location. Boardwalk and Park Place are the most expensive properties on the board. They are right around the corner from the cheapest properties on the board. The most expensive properties are the most expensive to buy but produce the highest rents. The cheapest are the cheapest to buy but produce the cheapest rents. Neither are the investors’ best buy. The best properties are on the second side of the board between Jail and Free Parking. St. James Place, Tennessee, and New York Ave are the best properties on the board (the orange ones). Although the rent’s not that high, the cost to buy isn’t as high either. With the orange’s your return on investment is higher than any other color. That’s a fact.
In the real world, location is critical too. In Kitchener Waterloo, there are some great areas (perhaps near the universities or Conestoga College and the 401) that produce great income, but the cost is high and may not be the best place for a first-time investor. Perhaps somewhere near uptown Waterloo or downtown Kitchener might be a better buy. A place within walking distance to Sunlife or Grand River Hospital could be like the oranges. So might other areas depending on big employers in the area, transportation and general lifestyle.
2) Don’t over improve your property. In Monopoly, your best return on investment is having three houses. After that, with four houses or hotels you experience a diminishing rate of return. What’s better is to have three houses and then go looking for further properties to buy.
In the real world, the same is true for improvements on your investment property. If an improvement doesn’t increase the value of your property or the rent you receive then don’t do it.
3) Start slow and then build up. Start by buying cheaper properties, which you can quickly bring to a stable income producing level. In Monopoly, the goal is to get your first set and then to get to the level of three houses as quickly as possible. The first player who does this, regardless of the property has an advantage. The best way to do this in Monopoly is to concentrate on the properties on the first side of the board. When you start collecting rent, you can then reinvest this into properties with better return.
In the real world this is a good strategy too. Start by buying the less expensive units. Naturally, your cost of borrowing will be lower, as will your maintenance costs. As you learn the business, if a unit sits empty you will stand to lose less. Later you can move up the food chain to better, more costly properties, like perhaps a triplex.
4) Be prepared to take advantage when a great deal appears. In Monopoly, a player can get strapped for cash and start to mortgage their properties. When they land on you, you might be able to get these properties for a song.
In real life, the same is true. Some owners, for various reasons, are in a hurry to sell. Sometimes banks sell properties. In the real world, properties are sold for less than their value all the time. If you know what the true value is, you can easily spot the deals when they appear.
5) Know the numbers. Dice games are all about numbers and statistics. In Monopoly the three spaces landed on most often are Illinois Avenue, B&O Railroad and Go. With two dice the most common role as a 7. It takes five rolls to get around the board. Doubles are rolled about 17% of the time. You should know how may times a player will have to land on your property with three houses in order to break even.
In the real world, the same is true in real estate investing. Know the numbers. Look at the purchase price, find out about the rent levels, look for sales of similar properties, find comparables, gather information. Find out what’s important to your renters. Is it a fenced yard or two-car driveway? Know the interest rates and the financing costs as well.