Playing games like Life, Chess, and Monolpoly have always been tools to give lessons. “Chess” teaches strategy. “Life” teaches that kids come, careers matter, and moving forward is the best way to succeed. And “Monopoly” teaches us about money and finance—simple capitalism. And the lessons keep coming. And Monopoly may just teach the best lessons of them all.
Monopoly is not a quick game, especially if the players have a strategy. You have to have patience and work your strategy. If you buy willy-nilly, you are nearly guaranteed to lose as your cash declines and available property becomes scarce. Buy smart and pass on properties that doesn’t match your philosophy.
And it’s the same in real life. If you buy without sticking to your real-estate philosophy, you’re likely to end up in a riskier place. Buy disciplined, and say “no” when it doesn’t fit.
CASH IS KING
In Monopoly, you know you’re doomed when your cash dries up and your opponent(s) have an ever growing pile of money. Same thing in real life.
If you recklessly buy up anything and everything, and you eventually have to pay your obligations, you can quickly become cash-strapped. Then you have to sell off properties at a discount. After that, only luck can save you.
During the great recession, because American’s had access to easy credit, they had available cash. But when the economy collapsed, people without pure cash were wiped-out—losing homes at deep discounts. And those with cash on hand, got incredible deals in buying steeply-discounted real estate for considerably less than they would at any other time. So the equity people built up—which was treated as their cash—disappeared overnight.
NO WAIT, CASH FLOWIS KING
Eventually, monopoly becomes less about acquisition and more about cash flow (from collecting rent). As your assets grow, you need to start replacing outflow of cash with inflow. Business 101.
Assets increase in value BECAUSE of their income. So any asset that adds to cash flow in some form is beneficial—even a simple savings account with interest. Some of the most largest and most valued companies in the world pay dividends on their stock, adding to their attractiveness to investors.
THE RIGHT REAL ESTATE
Who doesn’t want to own Park Place and Boardwalk in Monopoly? The biggest names and the most expensive assets in the game. The key word there is most expensive. The amount you pay to own and make and build up those properties is exorbitant. Those costs can only be recouped for a short time as the development of them can be expensive and slow. Yes, the big hit is great, but they are 1/3 less likely to be landed on and take the most effort to maximize their value. Other players can beat you with less expensive, but still valuable, properties that are maxed out early and in more abundance.
You reduce risk, in monopoly and in real life, when you diversify—which is hampered by having all your cash tied up in a few properties. In Monopoly, having a lot of property with 2-3 houses is a better strategy than a handful of properties with hotels. It’s important to get inflow quickly, and continually. Yes, an occasional windfall is nice, but steadily increasing income is a better target. And the opposite of a windfall is more likely to wipe out your position when your cash is tied up in fewer investments. Of course, over-diversifying to the point that you have no understanding of what your money is doing, or you mitigate all risk, could mean you are also mitigating your gains too.
WINNING THE GAME
Monopoly is not life, but there are valuable lessons in it. It’s the same with Chess, Life, and even more complex games like Settlers of Catan. You have and stick to a philosophy—with some flexibility that you understand. Have available cash. Have a budget you can work with. Get money flowing in to your accounts so you gain value from asset valuation and steady income. Buy the right assets—ones you can manage and understand, and that don’t put you at great risk. Save great risks for when you have extra disposable income or leave that to investors that are more liquid than you currently are. Pay attention to the cost, the maintenance, and the value, and the income—they’re all important.