By: Stefan Aarnio, award winning real estate investor, entrepreneur, author and coach.
Monopoly is over one hundred years old and it was designed to teach the principles of wealth creation. Wealth is created in monopoly in a three step process that correlates to the beginning, middle and end of the market.
Step 1: Build a business to earn income – In monopoly, the earliest phase of the game relies on you generating cash through making profitable trades of land, running profitable railroads/utility companies or potentially running profitable rental properties. In the real world, the fastest and best way to generate cash in the first step to wealth building is through a business. In real estate investing, this can be through flipping properties or wholesaling properties to generate the fastest cash possible.
Step 2: Convert earned income into passive income – The second phase in monopoly relies on a player investing his earnings into profitable residual income. The strategies that worked in phase 1 for cash generation become less relevant in phase 2 because the players have more cash and less land. In this phase, rather than investing horizontally and taking more land, players must invest vertically and build upwards into larger and larger buildings. Surviving through Step 2 relies more on passive cash flow from investing right and less on trading properties or profit. If Step 2 is done properly, we arrive at Step 3.
Step 3: Dominate the weak and grow large – The third phase in monopoly leaves one or two strong players with a large amount of red hotels slowly bankrupting their competitors. In this phase, small and weak competitors are driven out of the market and strong, cash rich, asset rich players are left to dominate the board. In phase 3 in monopoly, you will need both a large reserve of cash and a large base of strategic assets to survive until the end. In real life, players who reach the third step of wealth have outlasted all of their competitors and are growing exponentially larger every decade. The saying “the rich get richer” rings true for these people as they take advantage of bargains in the market.
The most common mistake Real Estate Investors make:
Most average real estate investors are stuck in the 3 step process. Many investors jump to Step 2 “Convert earned income into passive income” without ever building a business in Step 1. Building a real estate business or other type of business in phase 1 is so critical to becoming a successful investor because a successful business will bring in a constant stream of cash to grow your portfolio.
Many average investors are employees who have a nine to five job and try to invest their savings into property, but the problem with using your job to invest is the slow route to wealth because your income Is 1) heavily taxed, 2) limited by the time that you work and 3) unable to scale.
To create the fastest growing wealth possible, we must start with Step 1 “generating income through a business” before skipping to Step 2 and Step 3 in the wealth building process.
Stefan Aarnio, award winning real estate investor, entrepreneur, author and coach was recently inducted into the Rich Dad Hall of Fame. His book, “Money People Deal: The Fastest Way to Real Estate Wealth” is currently available on moneypeopledeal.com. To learn more about Stefan Aarnio please visit StefanAarnio.com