Have you played Monopoly recently?
Monopoly has been a classic board game for over a century.
It’s a real estate trading game played for fun… and for a chance to be a real estate tycoon.
I recently played with some of my grandchildren, and while it annoyed me that I wasn’t able to borrow to buy a property, I was still hooked on the thrill of accumulating Real Estate and collecting rent.
I also realized that there are some valuable lessons all investors can learn from playing Monopoly to help them win the game of property investing in real life.
Playing Monopoly with my grandchildren reminded me of a very important lesson all property investors must understand – and this is that not all real estate is equal.
You see…everyone wanted to buy Mayfair the most expensive street on the board, but no one really wanted the cheap locations at the other end of the board, the names of which I don’t even remember.
Then there are other locations on the Monopoly board, some of which were more desirable than others.
And it’s the same in real life…not all real estate locations are equal and just like there are different precincts on the Monopoly board, there are basically 4 types of locations where you could buy properties in the real world.
And as you’ll see a lot has to do with the demographics of those who want to and can afford to live in these suburbs.
These are the most expensive locations in our capital cities – the “established money” locations where most of the residents have lived for a long time and where many residents have paid off their home loans years ago.
Over the long term this sector of the housing market outperforms the other segments, in part because of its scarcity, but in particular because, as we know, the rich are getting richer than the average Australian and they can afford to and are prepared to, pay a premium to live in these prime locations.
Interestingly the property cycle values in these suburbs are often more volatile. However, over the long term, this segment of the market outperforms the other sectors.
These are the upper-middle-class areas and gentrifying locations of our big cities.
When this wealthier demographic moves into a suburb, they tend to push up property values.
As you wander through these suburbs, you’ll see a changing neighbourhood with new developments and infrastructure improving the quality of services for the residents as well as driving economic and job growth.
Types of aspiration suburbs
2. Beach/ water/ sand belt
3. School zones
4. Tree change/green change
6. Knowledge centres
This is where most homeowners and many investors look because that’s where they can afford to buy. However, sometimes investors buy in these suburbs because they are “advised” to buy at the cheaper end of the market.
Most locations at the affordable end of the property market underperform with regard to capital growth and rental growth. The tenants who rent in these locations live there because that’s all they can afford and are unlikely to be able to pay you increasing rents over time.
As an investor I would steer clear of these affordable locations – most of these will never gentrify in your lifetime and they will underperform with regard to rental growth and capital growth.
In every city, there are suburbs where people live because they really have no choice.
No one wakes up in the morning wanting to live in these suburbs, but social circumstances force them to.
Of course, investors should steer clear of these locations.
So just like owning the right locations on the Monopoly board, owning an investment property in the right location will do 80% of the heavy lifting of your property’s returns.
Just like not all properties locations are the same, not all properties within each location of the same.
Even in the best suburbs, there are some properties I would avoid – they just don’t make good investments and others I would be keen to have in my portfolio.
- A-Grade homes and “investment grade” properties are the type of assets you want to own, and the types of properties where great tenants want to live, not because they need to, but because they want to and are prepared to pay extra to live there.
- B-grade properties still have a lot going for them, and during hot property markets like we are currently experiencing they still perform well, but their secondary location within their suburb or the less-than-perfect attributes of these properties means they will slump more in downtimes when buyers and tenants are more choosey.
- C-grade properties – these are to be avoided unless they’re in a great neighbourhood and your intention is to demolish the property and replace it with something more appropriate for the location.
The bottom line
Just like in Monopoly, not all real estate is equal.
So be careful … don’t get stuck with an underperforming property in the wrong segment of the housing market when this property cycle eventually ends; because if history repeats itself, and it most likely will, you could end up with a dud property that you will regret owning and have difficulty selling if you need to.
Links and Resources:
Some of our favourite quotes from the show:
“You’ve heard me talk about the concept before that the rich are getting richer, and this isn’t going to change, so you need have the type of property that’s going to be in continuous strong demand by people who can afford to pay more for it over time.” – Michael Yardney
“Many investors have been hoodwinked a bit by so-called advisors who tell them to buy at the cheaper end of the market.” – Michael Yardney
“When you’re more grateful, you’re going to be much, much wealthier.” – Michael Yardney
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