When John came back from his long-drawn meeting with his auditor, he saw his 12-year-old twins playing the Monopoly board game with their friends. He joined along with Anu and Manu as he wanted to use the opportunity to talk about property- buying as an investment idea.
“Can someone explain this game to me?” he asked innocently. Eight-year-old Sameer replied: “You roll the dice and land in a square that you can possibly buy. These are places and they have different colours. Or it can be things like railroad or waterways. If you land on a place your opponent owns, you must pay rent. If you own all the places of the same colour, you can build one or more houses and collect higher rent.”
What to buy
He joined the game as a banker and when Ayisha, their 14-year old friend, passed on the chance to buy Mediterranean Avenue, he saw his opening. “Why did you not buy this place?” he asked. “There are a few properties that you land on rarely. They are not expensive, but if I spend my money on them, I will not have much left to buy the ones I really want to buy,” she said.
Ayisha explained that she looks at the potential rent she can get and picks the ones that give better returns. “I prefer properties that are near the jail, as these are often visited, when going around,” she said with a smile.
Manu pitched in: “I buy properties of the same colour so that I can build a house and possibly a hotel. If it is all mixed, there is not much additional value I can create, although I may have money.” Anu added: “I think buying the railroad is a good idea for rent. Plus, I buy different properties even if they are of different colours to prevent Manu from building a house. It is a waste maybe, but it keeps me longer in the game.”
“You guys are all very smart,” said John. “What I am hearing is that you must do enough research on the place — how popular is it, ease of getting there, return on your investment — before considering something. And when you buy, have a strategy on what is the long-term reason to own this.
“And owning infrastructure such as railroad has its set of advantages. They diversify your investments as they are different from the others on which you can build houses. But as the rent from these cannot be enhanced by adding anything, other properties become more valuable over time; so, this can only be a good short-term investment.”
When to buy
“You must also buy as soon as the game starts and not pass on any opportunity,” Sameer said. “And when you can add houses, do it quickly, as it starts to fetch higher rent. Of course, look at the cost benefit of adding a house — going from two houses to a third gives you 2.5x increase in rent. This can be a good deal,” Anu added.
“I prefer to buy low-income properties as nearly everyone skips them. I immediately add houses and hotels as that increases the rent. Plus, it prevents Anu from getting the houses,” Sameer said with a wink.
Ayisha pitched in: “When I end up in jail, I pay to get out so I can buy property. Later in the game, I don’t mind being in jail as going around only leads to landing in other’s property and paying rent.”
John was thrilled to hear these ideas. “You are all saying that one must start building for the future early in the career. In the game, you are given money upfront, and instead of sitting on cash, make the money work and look to invest in the right one immediately. In the real world, you must earn first — consider saving with the intention of making good investments.
“And your idea to take it easy later — by being in jail — is also a good one. In real life, we must minimise activities that will lead to cash drain and look for ways to conserve it. This will help you stay in the game longer and win it,” he summarised.
Other strategies
Sameer had a doubt: “Can you tell us when I must mortgage my property to get cash? I sometimes need to do that to pay rent. I don’t know which one to mortgage, and if I should use this method to get cash for buying property.”.
Anu answered: “You must not mortgage any property when you own two or more of that colour as it will prevent you from building. So, mortgage single properties If buying something will give you good returns, borrowing money is okay as you know you can repay and get your property back.”
“Yes, in general, borrowing is not a good idea. You must plan your finances and not rely on debt to meet your expenses. If you mortgage to invest and your cash situation does not improve, you may end up losing the property. But understanding the risk-return trade-off well can help you build assets that require more money than you have,” John said.
The writer is an independent financial consultant