For years, I have played Parker Bros Monopoly. We all have. And yet, too many of us did not learn the most basic real estate principles that this children’s game is teaching. So it’s time to be a kid again.
Monopoly is straightforward. Your goal is to strategically purchase properties, build houses and hotels, and then charge other players rent. In order to consistently win, you need a strategy. Unlike a game of Chess or Risk, Monopoly does not require a complex strategy, just a thorough understanding of the rules of the game and a plan of which properties best position you to have an advantage over the other players.
The same is true for home buying. Although the paperwork is certainly complex, your home buying strategy need not be complex. Simply have a good understanding of the financial impact that home buying incurs and a plan to meet those financial obligations.
Cash is King
I cannot count the number of times this mantra was repeated while I was in business school. Businesses fail when growth exceeds the company’s ability to fund the growth.
That concept is the same for individuals, which are actually pseudo-businesses. So for example, in order to buy property or a house, you need cash. You need a down payment and more importantly, you need the financial ability to meet each month’s mortgage PLUS utilities PLUS property taxes PLUS an HOA fee if applicable PLUS a number of other expenses you probably have not anticipated yet.
There are a large variety of online calculators that help you “determine” how much house you can buy. But they all fail to take into account your charitable donations and savings. For example, CNNMoney.com and Yahoo! Real Estate both offer online mortgage calculators. Even though Yahoo offers a more comprehensive approach and includes the front and back end ratios, it still fails to account for crucial keystones to a solid financial plan.
Often, using a front end ratio (monthly housing expenses / monthly income) of 28% is recommended. Depending on how much you contribute to charities and are saving for retirement, education, vacations, etc, you many want to consider a rate between 20-25%.
Remember, just as in Monopoly, if you don’t have the cash, then you lose! The bank will foreclose.
Life is a game of Chance
My wife hates that I always pick-up the good Chance cards and that she always ends up in jail or paying me money. But isn’t that just how life is? The other guy always seems to have better luck, while you are stuck with unforeseen bills and expenses.
In Monopoly, if you are not prepared for unexpected expenditures, then you end up mortgaging your properties. Consider a home equity line of credit to pay for the repairs on your commuter car the equivalent of mortgaging your property. When a player begins mortgaging properties, he or she often loses the game.
Therefore, you should always maintain an emergency fund of at least $1000 and preferably 3-6 months of expenses.
Are all of your ducks in a row?
In order to begin buying homes to place on a given property in Monopoly, you need to own all three (this excludes Park Place and Broadway) of the properties of that color. The same principle applies to your home purchase. You need to have the following three pieces in place before you purchase a home:
- Save at least 10-15% as a down payment. This may require that you purchase a more modest home. But it also means that you will stop paying Private Mortgage Insurance that much sooner.
- Do a lot of research and be patient. Know everything you can about the area around the home you are considering. Ask the neighbors with comparably sized homes what they pay in utilities. If it’s a long distance move, research the weather and local school systems. Unless you have to move today, wait until you find a great deal. Be patient and you can save a lot of money.
- Have a home inspection performed (this is assuming you are buying used). Even though the owner may offer you an inspection report, have your own performed. I have known individuals who received bad inspection reports (some intentional) from home sellers.
Conclusion: Plan before you buy
Winning Monopoly often involves having a bit of good luck, but the winner also has a plan. If you plan correctly and well in advance, if you do not allow yourself to make a poor decision no matter how much you like the home, and if you manage your finances using a budget and savings plan, then home buying will be the American Dream instead of the American Nightmare that so many are experiencing right now.
P.S. Amazon.com has a Nintendo version of Monopoly. Check it out!