Monopoly will help you in the real world of property development – that’s a growing view that is taking on a lot more meaning during this current recession amongst many developers!
Surely not. Monopoly is a game of luck rather than skill, and I would never win second prize in a beauty contest unless only two entered!
But when you start to consider Monopoly as a business model and have in mind it was invented during The Great Depression of 1934, you wonder whether it is worth taking seriously. Some insist that using strategy and skill, Monopoly can be won, and certainly you can increase your odds of success by following some fundamental truths found in the real world of estate agents and property development.
So we took a look in detail and drew some interesting parallels.
Listen to your statistics:
Monopoly is a game of numbers and statistics and these stats are well documented.
For example, which three spaces are landed on most frequently?
1st Trafalgar Square
2nd Fenchurch Street Station
3rd The Go square
How many dice rolls will it take to break even on your investment when three houses are placed on the suggested Bow Street, Marlborough Street and Vine Street set? 9.5.
How about Mayfair 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 maths.
Property Developers Lesson:
The same is true in property investing. When evaluating a property, know the numbers and statistics.
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.
Below are percentages for landing on any of the squares of the monopoly game.
The figures also have to take into account the probabilities for visiting jail and being in jail. (Hopefully this part won’t reflect the reall world application for you!) Each square shows the percent chance that a player will land on it after a single roll of the dice. The statistics are based on how it works out in the long run, so dont get to concerned on a one off throw.
These numbers indicate the percent chance that you will “end up” on each square after a roll, not just land on it. This is the reason the Chance and Community Chest probabilities are low. These figures take into account being sent to another square because of a Chance card.
Long Term Probabilities for Ending Up on Each of the Squares in Monopoly
Square | Probability % (Jail Short) | Rank | Probability % (Jail Long) | Rank |
---|---|---|---|---|
Go | 3.0961 | 3 | 2.9143 | 3 |
Old Kent Road | 2.1314 | 36 | 2.0073 | 36 |
Community Chest | 1.8849 | 37 | 1.7750 | 37 |
Whitechapel Road | 2.1624 | 35 | 2.0369 | 35 |
Income Tax | 2.3285 | 28 | 2.1934 | 27 |
Kings Cross Station | 2.9631 | 6 | 2.8010 | 8 |
The Angel Islington | 2.2621 | 32 | 2.1317 | 32 |
Chance | 0.8650 | 40 | 0.8152 | 40 |
Euston Road | 2.3210 | 29 | 2.1874 | 28 |
Pentonville Road | 2.3003 | 30 | 2.1680 | 30 |
Visiting Jail | 2.2695 | 31 | 2.1392 | 31 |
Pall Mall | 2.7017 | 15 | 2.5560 | 15 |
Electric Company | 2.6040 | 20 | 2.6140 | 13 |
Whitehall | 2.3721 | 26 | 2.1741 | 29 |
Northumberland Avenue | 2.4649 | 24 | 2.4255 | 22 |
Marylebone Station | 2.9200 | 8 | 2.6354 | 11 |
Bow Street | 2.7924 | 12 | 2.6802 | 9 |
Community Chest | 2.5945 | 21 | 2.2957 | 24 |
Marlborough Street | 2.9356 | 7 | 2.8210 | 6 |
Vine Street | 3.0852 | 4 | 2.8118 | 7 |
Free Parking | 2.8836 | 9 | 2.8253 | 5 |
Strand | 2.8358 | 10 | 2.6143 | 12 |
Chance | 1.0480 | 38 | 1.0448 | 38 |
Fleet Street | 2.7357 | 13 | 2.5671 | 14 |
Trafalgar Square | 3.1858 | 2 | 2.9929 | 2 |
Fenchurch Street Station | 3.0659 | 5 | 2.8930 | 4 |
Leicester Square | 2.7072 | 14 | 2.5370 | 16 |
Coventry Street | 2.6789 | 16 | 2.5191 | 18 |
Water Works | 2.8074 | 11 | 2.6507 | 10 |
Piccadilly | 2.5861 | 22 | 2.4381 | 21 |
Go To Jail | 0.0000 | 41 | 0.0000 | 41 |
Regent Street | 2.6774 | 17 | 2.5236 | 17 |
Oxford Street | 2.6252 | 19 | 2.4721 | 20 |
Community Chest | 2.3661 | 27 | 2.2276 | 26 |
Bond Street | 2.5006 | 23 | 2.3531 | 23 |
Liverpool St Station | 2.4326 | 25 | 2.2906 | 25 |
Chance | 0.8669 | 39 | 0.8158 | 39 |
Park Lane | 2.1864 | 33 | 2.0595 | 33 |
Luxury Tax | 2.1799 | 34 | 2.0521 | 34 |
Mayfair | 2.6260 | 18 | 2.4832 | 19 |
In Jail | 3.9499 | 1 | 9.4569 | 1 |
Location, Location its all about location:
If you could start a game by buying a set of properties of your choice on the board, which set would you pick?
Many would pick the Mayfair and Park Lane set, because you can charge the highest rent when some one lands on your property. Others would pick the Regent Street, Oxford Street and Bond Street set because rents are still high and you own three properties, thus increasing the chance of collecting rent.
Both options would be a strategic mistake though as the best group to own is the Bow Street, Marlborough Street and Vine Street set. Why? Because rolling a 6 or 8 from jail lands a player on these properties, in other words its a fact, they receive the most traffic on the board. Although the rents aren’t as high as other properties, neither is the cost to buy or improve them. This is where it’s about the long term ROI (return on investment).
Property Developers Lesson:
Location is critical to the real world of investing in property. Even within the same neighborhood, similar houses can vary significantly in value and rental income potential. studying the area where you invest and keeping updated on new developments is critical to successful investing. The best rental investments are not in the least expensive areas like Old Kent Road and Whitechapel Road or the most expensive areas like Mayfair and Park Lane. The real world shows that the best rental values are in nice, safe middle class neighborhoods and in decent school districts.
Don’t over improve your property:
Once you have a set, and are able to build houses you will need cash to make improvements. So what is the best way to add investment and improve your property? You shouldn’t add four houses and then a hotel just because you can afford it? 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 set to the next. The best choice depends on the cost of improvements and the potential return. For the Bow Street, Marlborough Street and Vine Street group, it’s best to add 3 houses on the properties. The cost-benefit analysis doesn’t justify a fourth house or eventual hotel.
Property Developers Lesson:
The same is true in the real world. When you buy homes that need work and improvement, you don’t want to over improve the property for the area. Just look for improvements that increase the home’s value or rents or that help rent the property more quickly. If an improvement does neither then it may be best to hold the investment.
[…] ways Monopoly Helps Property Developers Yesterday we looked at how Monoply can teach lessons in the real world of property development. When it comes to selected the right location for investment and knowing whether to make […]
What a great article, I never thought Monopoly will help you in the real world of property development
I’ll have this in mind
Love the whole concept and as you say it was created during the great depression of the thirties
Thanks Pete
we had fun thinking through the process and seeing how Monopoly provides some property lessons