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Real estate strategy: How to win at real life Monopoly

Gina Pogol
The Mortgage Reports contributor

Get rich in real life

One option many who play Monopoly ignore is the use of mortgaging to buy more properties and control the board. But that’s the best way to win! Here’s how to win at Monopoly in real life by adopting some of its real estate strategy.

  • How do you cash out rental property equity to increase your holdings?
  • Considerations for investors with multiple mortgaged properties
  • Mistakes to avoid

The leverage you gain with smart mortgaging allows you to control more rentals and acquire wealth.

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Monopoly and mortgages

The objective of this classic game is to control property and extract rents from your competitors until they run out of money. When you roll the dice and land on a property, one of three things happens: you buy it, you ignore it, or you pay rent if someone else already owns it.

Some properties are more valuable and desirable than others, and owning a matching group allows you to build homes and hotels and charge much higher rents. So if you already own Park Place and you land on Boardwalk, you don’t want to miss the chance to buy it.

Likewise, snapping up one of a color group prevents your opponents from getting all the properties in that group. And extorting huge sums from you when you land on their hotels.

But if you don’t have the cash to buy Boardwalk, you can still tie it up and keep your competitors from getting it — by mortgaging your other properties and using those funds to purchase Boardwalk. Mortgages allow you to increase your rental income while keeping your competitors from buying up all the good stuff.

Real estate strategy: leverage

Monopoly is not just a game. It parallels real life in many ways, especially relating to real estate investment.

One of the biggest advantages of real estate as an investment is that you can leverage it. That means you can control a large asset by making a relatively small investment upfront. You get leverage by borrowing part of the purchase price.

In fact, the less of your own cash you invest, the greater your possible return.

How does this work? Imagine that you buy a $100,000 property and in a year, its value increases to $105,000, a 5 percent return. But if you had bought the property by putting 20 percent down ($20,000), you have a 25 percent return! (That’s a $5,000 gain divided by your $20,000 investment.)

Related: How to use a cash-out refinance to buy another home

If you had taken your $100,000 and bought 5 similar properties with 20 percent down payments, you’d have made $25,000 in appreciation instead of just $5,000.

According to Alex Hemani at Forbes.com, leverage in real estate investing works best when property values and rents are increasing. Today’s economic climate in much of the country fits that description.

Related: Do a cash-out refinance on your rental property (guidelines for 2018)

And while most investor property mortgages require at least 20 percent down, getting that 20 percent from your other properties allows you to leverage a lot more.

Investment cash-out mortgages in real life

There are many ways to extract equity from investment properties.

  • While government-backed mortgage programs won’t allow you to finance rental homes, Fannie Mae and Freddie Mac allow cash-out refinancing on investment property
  • Typically, you can borrow 65 to 75 percent of the property value
  • Some niche lenders offer home equity loans and lines of credit secured by rental property — a good option if you like your current mortgage and don’t want to replace it
  • If you have more than four properties financed, you will have to jump through extra hoops and won’t be eligible for some kinds of mortgages. However, there are specialty lenders that fund these mortgages all day long

Investment property cash-out refinancing may take longer than refinancing a primary home if you need the rental income to qualify for the purchase. The appraiser will have to prepare a rental schedule and the lender will put your cash flow and cash reserves under a microscope.

Related: How to finance more than 4 properties

Financing more properties

Mortgage lenders require significant cash reserves when financing rental property, and the more properties you have mortgaged, the higher this number may be. In most cases, underwriting software applies complicated formulas to your situation and calculates a number between zero and 12 months of payments.

One month of reserves is cash to pay one month of housing expense for the subject property — principal, interest, property taxes, homeowners insurance, HOA dues and flood insurance (if applicable).

Fannie Mae’s guidelines say that reserve requirements “vary depending on

  • the transaction,
  • the occupancy status and amortization type of the subject property,
  • the number of units in the subject property, and
  • the number of other financed properties the borrower currently owns.”

Finally, most lenders want to know that you have some experience in real estate or property management, or previous landlord experience, to show that you are capable of successfully renting out property. And covering the monthly mortgage.

Mistakes to avoid

New property investors make some common mistakes. Here’s what to avoid.

  • Failing to run the numbers. An investment purchase should be determined by its income potential — not because it reminds you if your grandmother’s old place
  • Failing to plan. You always want an exit strategy if the investment doesn’t work out as planned. And set goals for your investment, so you know if it’s working out or not
  • Acting out of fear. Inexperienced, fearful investors either think they have to grab the first property they see, or they are so terrified that they never move on any property
  • Expecting overnight riches. Most property investors make their money over time, paying off their mortgages and investing their rental income

Many, many wealthy people in the US got there with real estate investing. And you can, too, by doing your homework and being patient.

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