Wealth is Good
Cash Flow Is Better

The Famous Board Game Offers Lessons on Real Estate’s Rewards – and Risks

Monopoly is one of the most popular board games of the past century.  And why not?  It gives you the opportunity to acquire wealth in form of real estate AND to generate cash flow not just from the properties but by also by passing “Go”.  What’s not to like?

But time moves on, and to stay on top you need to adjust to change .  The length of a typical Monopoly game is often over an hour, and can stretch to 3 or 4 hours.  I remember playing a game with my childhood friends that lasted two days.  Now that might have been a good thing in the 20^th century but to maintain a leadership position among games in this new millennium where sound bytes and multi-tasking rule, sitting in one place for 3 or 4 hours or more just won’t do.

So I’d like to share a secret strategy to help you win at Monopoly, and to win quickly.  The secret:  Get a hotel, any hotel.  It’s only a matter of time before others check in, pay you loads of rental income, and then check out…of the game.

WARNING: This secret strategy doesn’t work all of the time.  Why?  Because, like life, Monopoly is a game of chance (hence the dice).  That means there are risks. But if you understand what is behind the risks you can manage them in order to nudge the odds in your favor.

Monopoly is mainly about acquiring and managing real estate.  Importantly, real estate has an edge over many other investments:  leverage.  Leverage allows you to acquire a property by paying only a percentage of its total price up front and borrowing the rest.

Here’s an example of how it works.  Let’s say you put a $20,000 down payment on a $100,000 property.  (You borrow the other $80,000 in the form of a mortgage.)  If the property appreciates 5% in a year you benefit from 5% growth on the full $100,000 value of the property; so your investment grows in value to $105,000.  That’s a $5,000 increase on your cash outlay of $20,000, so the return on your investment is 25%.

If instead you had put your original $20,000 into a savings account that pays 5% interest, the account would have grown by $1,000, not $5,000.  There is no leverage associated with the savings account so the return is, in this example, five times less than the return on the real estate investment.

Real estate has an edge over many other

investments: leverage.  But while leverage

can be your best friend, if mismanaged

it could turn into your worst enemy.

Leverage allows you to accelerate the timeframe to purchase multiple rental properties, and this in turn creates the opportunity to potentially grow the total amount of your rental income.  That’s what you’re doing in Monopoly when you upgrade from a house to a hotel.  In the game, hotel rents are so high that most other players can’t afford to land there more than two or three times before it cleans out their bank accounts.

So that’s the strategy for winning Monopoly. Trade up to a hotel and rake in the cash.

Oh, but I forgot to address the risks.  While leverage can be your best friend, if mismanaged it could also be your worst enemy; for while it enables you to grow your real estate portfolio rapidly, by doing so you could be increasing your debt at an unsustainable rate.  That is, the income from your properties isn’t enough to pay for the cost of carrying the assets – you can’t make your monthly mortgage payments.  In that case, it will be your bank account that is cleaned out.

For a real-world illustration of this, see our “Wealth and Cash Flow Lessons from Donald Trump” article.  In the meantime, enjoy the game!

Keith Whelan is Cashflownavigator's founder and author of the "Wealth is Good, Cash Flow is Better" e-booklet. He is a graduate of Columbia University Business School, teaches at Rutgers University, and has over 30 years experience in the banking and financial services industry. Keith, his wife Cindy, and their two sons live in New Jersey.