Applying the Pareto Principle
In my business coaching program, I have been focusing on the Pareto Principle (also known as the 80/20 Rule) and started to think about how I could apply the 80/20 Rule to real estate investing, as well as to many other elements and events in life. This principle is also known as the law of the vital few, or uneven distribution. The 80/20 rule was suggested by management consultant Joseph M. Juran and named after the Italian economist Vilfredo Pareto who first noted the 80/20 connection in his 1896 publication, Cours d’économie politique.
Simply put, the 80/20 rule states that roughly 80% of the effects come from 20% of the causes. Pareto developed this principle while observing that about 20% of the peapods in his garden contained 80% of the peas. On the economic front, Pareto demonstrated that 80% of the land in Italy was owned by 20% of the population.
Since then, people noticed that the 80/20 rule could be found in a wide variety of circumstances. For example, even today, in the United States, roughly 20% of the people hold about 89% of the wealth. According to Microsoft about 80% of computer systems errors and crashes come from 20% of the bugs. About 87% of the world’s Gross Domestic Product (GDP) comes from the richest 20% of the global population and 20% of the world’s people consume almost 77% of all goods and services.
The 80/20 rule doesn’t always refer to exact percentages, but this principle does demonstrate this law of uneven distribution and can serve as a good rule of thumb when looking at efficiencies and distribution of resources and/or successes.
The 80/20 rule can be applied throughout your life. Think about it. I’ll bet your passions probably represent about 20% of what you do, but produce about 80% of your happiness or personal satisfaction. Typically, about 80% of your household wealth comes from only about 20% of your assets. So, what are those assets? I guarantee real estate will be one of them.
Understanding the 80/20 rule comes down to focusing on those tasks that produce the best intended results – determining the 20% of tasks (what we do/what we have) that produce 80% of the desired results.
So how can we apply this principle to real estate investing?
Once again, we find the 80/20 rule applies to real estate investing: about 20% of the real estate investors achieve about 80% of the wealth generated through real estate. Interestingly, you’ll also find the principle applies to mortgages for investment real estate, you usually find that lenders will conventionally finance about 80% of the property’s value with 20% down. The 80/20 rule also applies to other aspect of real estate investing:
- Systems: 20% of your implemented systems can deliver 80% of your success and results
- Markets: 20% of the markets will produce 80% of the properties
- Properties: 20% of your properties give you 80% of the return
- Tenants: 20% of your tenants can cause you 80% of your problems
- Lenders: 20% of your lenders will provide you 80% of your mortgage financing
- Money sources – joint venture partners: 20% of your joint venture money partners will provide you with 80% of your funding requirements
In order to apply this rule specifically to your own real estate investing, it’s useful to look at the activities you do each week that produce your investment income and determine which of these activities are part of the “effective 20%”. In other words, take a good look at how you spend your time, identify the things that you do that are most effective and focus on them. Start by simply tracking your time, tasks and the results of your efforts, and you’ll soon be able to recognize how the 80/20 rule applies to you and your real estate investing. In additional to the items above, look at things such as:
- How much time do you spend learning and what type of information is giving you the best results? Warren Buffet maintains that “learning” is the most important way to spend your time.
- How much time do you spend researching a market or prospective deals?
- How much time do you spend setting up the criteria to find the right deals (the 20% that are the most effective deals, or to put it another way, criteria to eliminate the 80% that don’t do as well as your 20% ones)?
- What deals produce your best results? What are the characteristics of those deals vs. others? Which deals consume(d) most of your time?
- Which of your existing properties require most of your time, and which operate efficiently with minimal effort on your part (the desirable 20%)?
- Can you duplicate that type of property?
- What makes it/them so successful?
- Is it successful/efficient because of location, market timing, major announcements/events in the community, property size, layout, level, structure, exposure, etc.?
- Is it in a unique position, such as pricing for rent or purchase price?
- Is it appealing to particular types of tenants such as empty nesters, singles, couples, millennials or retirees?
- Is it a combination of several factors and if so what are they?
- How much of your time is taken up with tasks such as advertising rental properties, maintenance and repair, tenant turnaround, and so on?
Taken together all of this information will help you determine your own real estate investing 80/20 rule. In turn this will then enable you to make adjustments to your current portfolio, so that you can:
- look for other potential property opportunities that duplicate your current “high performers”,
- use your existing equity to generate more wealth and income by redeploying such assets,
- understand how you’re spending your time, which may help you determine whether you should be hiring others to support your real estate investing, property management, etc. In other words, understanding your 80/20 rule can help you build a more effective real estate investment team.
Use The 80/20 Rule to Maximize Efficiency
It comes down to prioritizing where and how you spend your finite resources to deliver your highest results. Understanding and applying the 80/20 rule to your own real estate investing will enable you to narrow your focus on those things, resources and activities that have the highest impact. As you hone your focus you may find that you’re concentrating on making fewer, but bigger, investment decisions. Or you may find the type of investment that works best for you and provides a good balance of time, effort and investment. Identifying this type of investment then enables you to replicate that success by looking for similar investment properties.
Ultimately, the core purpose of investing is to provide the financial means to let you focus on those things that are most important to you. Take the time to find your real estate investing 80/20 rule and then you can utilize it to help achieve your own 80/20 rule in life – make the most of what you’re good at and use your energy to realize your passion.
The whole purpose of Strategic Investment Real Estate is based upon the 80/20 rule, whereby our professional and licensed team and turn-key investing systems do exactly that for our clients. Our goal is to maximize your real estate returns for you while minimizing your time, effort, energy and resources in researching, buying, and building your real estate portfolio to create wealth for you in the long term so that you focus on and maintain your present and future desired quality of life, without buying yourselves another job. We are hands on so that you don’t have to be.