A few months back, we had a get together of a few cousins after many years. Reminiscing about our younger days, we had the great idea of playing Monopoly as a way to recapture our childhood. While playing the game, it struck me how Monopoly had some profound lessons on prudence for real estate investors. Before I elaborate, let’s recap how Monopoly is played so as to bring everyone up to speed.

A quick primer on how Monopoly is played

Monopoly is a multiplayer game where you are allocated a limited sum of money to buy properties. Whenever someone lands on a property that you own, you collect the rent on the property and vice-versa. If you own all properties of the same colour, you are allowed to build guest houses and hotels which allow you to collect higher rents from those who land on them.  The purpose of the game is simple – empty other players’ pockets.

An important feature of the game is that those who are thin on finances can mortgage their properties to raise cash and settle their debts.

The mistakes I made

When I was young, I thought that the winning formula in Monopoly was to acquire as many properties as possible with the cash I had. Invariably, however, I would end up losing the game in spite of having more properties than the other players. It turns out that I had overreached and bought more than what was required, saving little cash in the process. Does this ring a bell?

I ended up mortgaging properties in order to build houses/ hotels on the others and sometimes, just to stay afloat. Mortgaging is a real dagger in the heart. You get 50% of the value of the property and all the benefits of ownership are suspended till the mortgage is in place. In order to release the mortgage, you have to pay the full price again. It turns into a vicious circle and more often than not, properties that are mortgaged are never released.

In hindsight, instead of buying more properties, I should have paid more attention to managing and holding cash. This was an important lesson.

Even if you end up with limited number of properties, you can use the cash for productive uses like building houses and hotels which bring more earnings, ultimately giving you a good chance of winning the game. Also, sooner or later, you will land on someone else’s property and would have to pay up. The value of cash is realised in such circumstances.

Sometimes a game resembles reality

Who could have thought that a children’s game could have invaluable lessons for real estate investors. The above problems that children face when playing Monopoly appear eerily similar to the present day reality of many adults. Many, otherwise intelligent people, have overextended themselves and bought idle properties just for the sake of price appreciation without thinking about its productive uses. What is worse is that when left with no money of their own, they took extensive loans just to gobble up what was on offer. This was all good as long as property prices were constantly rising and there was a market with adequate number of buyers in the system. You could turn the real estate like a stock in trade and the profits were more than sufficient to service the debt.

And then the market stagnated. I love the following quote from Howard Marks on the subject of liquidity:

“It’s possible that liquidity can be relied on when sellers and buyers are balanced in number and degree of motivation. But more often, given herd mentality in markets, “everyone” wants to either sell or buy at once.

There’s an old saying to the effect that “In times of crisis, all correlations go to one.” The prices of everything move in unison during crises because investors are driven by mob psychology not fundamentals. Thus – and for the same reason – in times of crises liquidity often goes to zero.”

As always, the chickens have come home to roost and the bursting of the real estate bubble is taking its toll on yesterday’s flamboyance. Accounts are turning NPAs and people are running for cover.

If only they would have paid more attention to Monopoly!

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