Why business ain’t like playing Monopoly

PayDayWatching TV late at night and learning how to flipping houses, might lead you to think that real business seems a lot like playing Monopoly(tm). After all, the object of Monopoly is to buy as many properties as you can and end the game with the most money. Sounds like a sound formula for early retirement, eh?

In Monopoly, your costs are based on which spaces you land on, and what your opponents own. If you land on property taxes, then pay $75. If you land on an opponent’s property, then pay rent. If the opponent’s property has a hotel on it, then pay a lot of rent. Your costs depend on where your pawn lands, not how much property you own.

In the real world, companies (and house flippers) must pay fixed costs, which usually increase with the amount of property that you own.  No matter how much or how little revenue you take in, you have to pay fixed costs. If you don’t, then you lose your property. Therefore, because fixed costs create risk, the more property you own, the higher your risk.

Get it? In Monopoly, your costs are roughly based on your opponents’ assets. In real life, your costs are based on your own assets.

This means that a strategy that would be successful in Monopoly could, in the real world, spell disaster. My Monopoly strategy, which usually works against young children, is to buy as many properties as you can, before your opponents, so that you can hit your opponents up for rent every which way they turn, rather than letting them do that to you. In the real world, this would be a rather stupid thing to do. Every property that you buy will increase your fixed costs, including property taxes and interest, thereby increasing your risk of failure. Furthermore, with all of your assets invested in real estate, a systematic drop in prices and rents would finish you off.

In short, minimize your assets and your fixed costs.

[Image: PayDay by Mark Strozier, on Flickr]

3 thoughts on “Why business ain’t like playing Monopoly

  1. Wondering how that applies to real estate market, say if the business is to hold properties, and make income from rent collections and from flipping.

    • Great question, Yoyo.

      In Monopoly, real estate values and rents don’t change unless you build on your property.

      In the real world, real estate values and rents are constantly changing, and they all will often move up and down together. This creates risk that doesn’t exist in Monopoly.

      What other parallels are you thinking of?

      Mark

  2. I agree with a lot of your comments regarding the correlation between Monopoly and real life. However, I think we may differ in opinion when you say, “In short, minimize assets and fixed costs.” It could be something as simple as just how we define assets. Assets can be defined as anything that puts money into your pocket (positive net profit). Therefore, accumulating more assets and/or increasing the value of your assets is actually the way nearly everyone becomes wealthy. Yes, fixed costs increase with the acquisition of every addition asset, but as long as you’re making money on the investment, it’s improving your cash flow/net worth, not hindering it. One thing the wealthy do, though, is pass up on assets that could make them money due to opportunity cost. The wealthy calculate the rates of returns for each asset to ensure they get the best bang for their buck. Regarding rent and value of real estate going down together, rent stays fairly stable (usually increases only due to inflation). In addition, when the housing markets down, the result is homes decrease in value. However, a recession also means people will have less money to afford their own mortgage. This creates more demand for renters in a down market. This hedge against bad markets is one of the many reasons real estate is so attractive and has created wealth for so many people!

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