Real Estate Lessons from…Monopoly

Developed at the height of the Great Depression by a committed socialist, Monopoly is an unlikely success–and perhaps not at all what its creator intended. Nonetheless, Monopoly has become one of the most successful board games in history: as of 2010, the game sold some 247 million sets across 114 countries, and was produced in 47 languages.

But history and facts aside, Monopoly has some very interesting finance and real estate lessons for its players. It’s also an incredible teaching (and learning) tool, simply because the game covers so many real-world aspects of the real estate business.

Let’s get started.

Properties are not what they seem

In Monopoly, all properties are color-coded–a handy, quick reference for players. If one goes by retail price and rent, then the most expensive properties are the blue areas: in the American edition of the game, these properties are Florida Avenue, Boardwalk, and Park Place. As the priciest in the game, they retail for approximately $350-400 (about $6,000 in 1945 dollars), and furthermore, have the highest rent: starting rent at Boardwalk, for instance, is $50, which increases to $2,000 with a hotel.

Yet not all that glitters is gold. As valuable as these properties are in terms of pure price (they are the most expensive after all), the blue areas don’t actually generate the highest return on investment. This is due to one simple reason: statistically, the blue areas are among the least likely to be visited in the game, ranking ninth of ten color groups. Less visitors means less rent–and thus, less income.

Instead, the most commonly visited properties are the red and orange color groups, which are situated next to jail, and thus, are the best options for building up a good yield in a short period of time. Interestingly enough, the same analysis posits that green properties have the largest return, due to the high rents charged–as well as a steady stream of visitors; the downside, however, is that greens take a while to generate such a yield.

Balancing the downsides of properties, particularly where it comes to location, market cap, and profit & losses, is an integral part of the real estate investment process. Research is indispensable, because properties are never what they seem to be. After all, in real estate, stories of failed properties are legion.

Balance Risk and Reward

In many ways, this dilemma is the core of investment: how do you effectively manage the interplay between taking on risk and the reward generated by said actions? Central to this is the question of cash flow: you’ll need a steady stream of cash to continue financing your expansions (either buying new land or developing existing possessions), as well as for staying solvent (paying rent when you land on properties owned by others).

Monopoly is particularly good for honing your instincts, particularly where it concerns balancing risk and reward (and maintaining your cash flow in the process). The board is populated with a large range of properties (ten types of properties, coded by both color and function), which lends itself to a variety of strategies.

Do players go big, targeting the largest, most expensive properties and pouring plenty of cash into developments like houses and hotels? Or do they knock off the smaller fry first, buying up a collection of inexpensive properties and slowly developing them over time? And above all, how will they maintain a healthy cash reserve to hedge against unforeseen circumstances, like drawing a “Go to Jail” card from the Chance pile?

The strategies are varied and numerous, but in the end, every player has to understand how to weigh risks and rewards. Anything else incurs the possibility of bankruptcy.

Create barriers to entry

My firm, GreenOak Real Estate, specializes in gateway markets; over the years, we’ve found that one advantage of such markets is the barriers to entry. As I’ve written previously, a mixture of incredibly strict zoning regulation and high construction costs in cities like New York leads to a shortage of new supply. These barriers to entry create high rents, simply because they fit into the classic economist’s dilemma: even as demand continues to rise, supply remains the same (or is improved very slowly).

Monopoly is much the same. Players are working with a limited amount of space at hand, as the board isn’t going to expand any more. True, you can develop any property you buy, but you’re working with very real constraints: what you see is what you get, and you can’t simply move overseas to an untapped market.

Moreover, as investor George Deeb points out, Monopoly also teaches players to build these obstacles to entry. For instance, when Deeb plays, he often follows a few, well-worn tricks to exclude competitors from the market. First, Deeb will buy up all the properties in a single color family, so that he can get bonuses (if one player owns all the unimproved lots of the same color, they will receive double rent). Next, Deeb also tries to buy up as many neighboring properties as possible, so that long stretches of the board belong to him (thus forcing players to pay rent only to him).

In Diversity, Strength

Monopoly hammers home the importance of diversifying a real estate portfolio–a valuable lesson in real life. Don’t gamble by going all in on one investment: for instance, stay away from purchasing (and developing) only one property, to the exclusion of others. As is obvious by now, the point of Monopoly is to generate as much cash as possible: it’s pointless to develop one or two properties to the fullest, when you can expand quickly around the board. After all, each property is a chance to capture cash–and if you have fewer properties, you’ll also have less chances to collect rent.

On the other hand, overexpansion will leave you open to bankruptcy, depleting your cash reserves. In fact, there are real dangers to over-diversification: studies show that the optimal diversity (for stock portfolios, at least) is around 20 stocks. Any additional investments have negligible effects on reducing risk–and may actually be harmful. Clearly, diversifying without a strategy (or a cap on the number of assets included) is inadvisable, both in Monopoly and real life.

In conclusion…

Monopoly isn’t just a board game; it’s also a fun, unconventional way to learn the basics of real estate investment, honing strategies and mindsets on the real world. Best of all, it’s a low-cost education: all you need are a handful of players, a board game, and a few hours to kill.

By | 2017-08-15T19:06:59+00:00 August 15th, 2017|Real Estate|0 Comments

About the Author:

Sonny Kalsi is an accomplished real estate investor with more than 20 years of experience that spans a range of areas, including: investment management, real estate financing and hedge funds. Since 2010, Sonny Kalsi has worked as a partner-owner of GreenOak Real Estate, the independent real estate merchant banking platform where he is also a founder. Sonny's professional career also includes almost two decades of experience at Morgan Stanley, where he served as Managing Director and Global Head of Real Estate Investing in parts of Asia and in New York City. In an effort to share this wealth of knowledge and experience, Sonny Kalsi teaches at Columbia University as an adjunct professor in the university's Real Estate Development program. Connect with Sonny on Twitter at @SonnyKalsi_

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