As seasoned investors in residential real estate, we’d like to think of ourselves as competitive Monopoly players.
The first thing to do is spend your money. When the game begins, you won’t spend all your money on rent unless you’re (a) a ridiculously big spender or (b) very unlucky.
The amount of money each user starts out with won’t keep players alive in the endgame. Every property someone passes up in the early game is an opportunity for the competition to inch ever-closer to the perilous monopoly. So we recommend users use their money at the start of the game to acquire properties. As every real estate investor knows, cash flow is the name of the game. You can’t get without giving.
But, not all properties are equally good. And while higher prices do correlate with inflated rents, you probably won’t be surprised to learn that not all the game’s properties offer the same risk-adjusted returns.
That’s why the game is about the tried-and-true mantra “location, location, location.”
Two important forces factor into the decision analysis. First, not every property is equally likely to be landed on. Second, not every property has the same cap rate.
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Acquisition cost isn’t directly correlated with expected returns, so investors can maximize their expected returns by choosing where to invest carefully.
The trick to excellent cash-on-cash returns in Monopoly is stabilizing your investments.
A stabilized asset is one on which construction or renovation is completed, and which yields enough revenue to sustain debt service. Although Monopoly doesn’t involve making mortgage payments, the basic idea is that you should aim to develop your properties as quickly as possible to optimize returns. The odds of breaking even on undeveloped property — as the table above shows — aren’t in your favor.
But there’s another issue to consider: if you take a close look at the statistics, you’ll see that although Class-A properties like Broadway can potentially bankrupt your opponents quickly, they don’t offer the best returns on your investment. And you don’t win Monopoly by taking out other players yourself; you win by surviving the longest. That means you want to be the player with the biggest margin of error (which basically means most cash in the bank).
What does that mean?
Don’t sleep on cheaper properties. Red and orange properties are some of the most likely to be landed on, and offer some of the most competitive returns on investment.
(We’d be remiss if we didn’t point out that this is the basic thesis of workforce housing: Class B multifamily properties don’t command the loftiest rents in any given metro, but they do very often offer better returns for the cost and risk.)
Nothing in Monopoly feels worse than slowly amassing properties, earning income, becoming a formidable tycoon in your own right — and suddenly, all your hopes at sweet victory are dashed by an improvident roll that makes you pay the highest rent on the board.
Fortunately, there’s two important ways to keep your risk under control.
(Incidentally, these strategies are also where the analogy to real-world real estate investment completely breaks down. Hey, it’s just a game.)
First, sometimes it’s well worth acquiring a property you don’t intend to develop to prevent your opponents from acquiring a monopoly. IRL, this is a pretty unethical strategy that’s highly unlikely to pay off. But in Monopoly — well, that’s another story.
Second, in the late game, it’s usually better to stay in jail for as long as you can. Nobody likes the slammer, but if it keeps you from paying rent for a few turns, it can make the difference between victory and defeat.
We were today years old when we realized there’s statisticians out there who go this hard for Monopoly.
We’re pretty impressed that there’s such deep knowledge out there on what looks initially like a fairly simple game. Might be fun to ambush partygoers at your next family get-together.
But, we’d be remiss if we didn’t offer one closing admonition: knowledge is power, and with power comes responsibility.