5 Lessons Monopoly Can Teach Us About Real Estate Investing

As reported on the official MONOPOLY website, in 1934 during The Great Depression, Charles B. Darrow of Germantown, Pennsylvania introduced the MONOPOLY game to the executives at Parker Brothers. They rejected it, citing 52 design errors. Unemployed like many Americans, Mr. Darrow believed in his game and began to produce it on his own. Mr. Darrow sold 5,000 handmade sets of the game to a Philadelphia department store. Monopoly was an instant success, and Mr. Darrow was unable to meet the growing demand. He returned to Parker Brothers whose executives now saw the light. In its first year, 1935, the MONOPOLY game was the best-selling game in America. In its 70+ year history, an estimated 500 million people have played the game of MONOPOLY.

And those 500 million people can be divided into two groups. Those that seem to win every time they play and the rest of us. Question: To what extent does luck determine who wins a game of MONOPOLY? Our answer to that question probably says more about us than the game. Although the role of the dice plays a part in determining the winner, the game of MONOPOLY also involves a lot of strategy and skill. And it’s that strategy and skill element of the game that can teach us a lot about real life real estate investing.

Strategy #1–Location, Location, Location: If you could start a game by buying a Monopoly (owning all properties of a single color) of your choice, which color would you pick? Many would pick Boardwalk and Park Place, because you can charge the highest rent when some poor sap (usually me) lands on your property. Others would pick the green color group (Pennsylvania, Pacific and North Carolina) because rents are still high and you own three properties, thus increasing the chance of collecting rent. Both options would be a strategic mistake. The best color group to own is orange (St. James Place, Tennessee Avenue and New York Avenue). Because rolling a 6 or 8 from jail lands a player on the orange properties, they receive the most traffic. And while the rents aren’t as high as other properties, neither is the cost to buy or improve them. Thus, your return on investment is, on average, higher than other color groups.

Real world application: Location is critical to the real world game of real estate investing, too. Even within the same neighborhood, similar houses can vary significantly in value and rental income potential. Thus, studying the area where you invest and keeping updated on new developments is critical to successful investing. In addition, Mike and I have found that the best rental investments are not in the least expensive areas (think Baltic and Mediterranean Avenues) or the most expensive areas (think Board Walk and Park Place). We’ve found that the best rental values are in nice, safe middle class neighborhoods in decent school districts.

Strategy #2–Don’t over improve your property: So you finally nab a monopoly and have some cash to make improvements. Do you add four houses and then a hotel if you can afford it? NO! Over improving a property in monopoly can deplete your cash and make it almost impossible to ever break even on your investment. And how much you improve a property will vary from one color group to the next. The best choice depends on the cost of improvements and the potential return. For the orange color group, for example, conventional wisdom says to put 3 houses on the properties, but no more. The cost-benefit analysis doesn’t justify a fourth house or eventual hotel.

Real world application: The same is true in the real world. Mike and I buy homes that need work and improve them. But we have to watch that we don’t over improve the property. We look for improvements that increase the home’s value or rents or that help rent the property more quickly. If an improvement does neither, we don’t do the improvement.

Strategy #3–Start slow and then build up: One strategy is to aim for a monopoly on the first two sides of the board, which are the least expensive. When you gain a monopoly, buy 3 houses (and no more–see #2) as quickly as possible. Then use the cash generated from these properties to shoot for a monopoly on the more expensive side of the board. By the time you’re looking to buy the more expensive properties, you may be able to get them for a song from another player desperate for cash. So start with less expensive properties and work your way up.

Real world application: This is a good real world strategy, too. Buying less expensive properties generally involves less risk. The mortgage will be lower, which can make a huge difference if the property is vacant longer than anticipated or the tenant stops paying. Maintenance is generally less for lower priced properties. And they can still represent an excellent investment. Over time, as cash flow improves and you become more comfortable managing property, you’ll be in a good position to buy more costly properties, such as multi-family units or apartment buildings.

Strategy #4–Constantly look for great deals: When you land on a property owned by the bank, the price is non-negotiable. But as the game progresses, other players may find themselves in need of cash. That’s when great deals can surface. They get the cash they need to stay in the game, and you get a property at a good price.

Real world application: Buying foreclosure properties is the real world equivalent. All of the rental properties Mike and I own were bought from HUD. You can check out our tips and tricks for buying HUD properties here. The deals we get from HUD are far better than we could ever get buying retail. And even within the HUD listings we are very picky. We look at a lot of properties before putting in a bid, and we bid on many more properties than we end up buying. It takes work, but it pays off in the end.

Strategy #5–Know the numbers: Monopoly is a game of numbers and statistics. For example, which three spaces are landed on most frequently? Illinois Avenue, B&O Railroad and Go, in that order. On average, how many of your opponents’ rolls of the dice will it take to break even on your investment in three houses placed on the orange monopoly? According to a recent article describing MONOPOLY strategy, 9.5. How about Boardwalk with no houses? 120.52. On average, how many rolls does it take to navigate around the board once? 5. What percentage of rolls results in doubles? 17%. To win at Monopoly regularly, one must know the numbers.

Real world application: The same is true in real estate investing. When evaluating a property, know the numbers. When we evaluate a potential purchase, we find comparable rents and sales. We also know how certain property features will impact rents and our ability to rent the property quickly. For example, we’ve learned that a fenced yard and basement are very important to many renters. And we have a good idea of the difference in rent between a three bedroom and four bedroom single family home. We consider expenses, such as property tax, insurance, and estimated maintenance and vacancy costs. We check current interest rates and calculate financing costs. From these numbers, we can estimate cash flow. Knowing these numbers cold is critical to getting the most out of your investment.

As important as your approach to real estate investing is, it doesn’t compare to beating your brother-in-law in MONOPOLY. So if you’re looking for more strategy tips and tricks, check out these books: