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How the 80/20 Principle Can Make Real Estate Investing More Effective

How the 80/20 Principle Can Make Real Estate Investing More Effective

Real estate investment is all about following up on leads, staying on top of your contacts, and advertising your business to generate new leads, and all of this can be exhausting. Thanks to the internet and technological advancements nowadays, there are many online tools that can help you with this. Sure, this simplifies things a lot, but it still takes a lot of time and effort to keep up with all your clients and improve your customer relations while trying to build new ones.

Do you ever get the feeling that you can do all of this more efficiently, or that despite all your efforts, most of your revenue stems from only a small portion of your efforts? This is what the book “80/20 Principle: The Secret to Achieving More With Less” is all about, and we’re here to talk about what it means for real estate investors.

So, what exactly is the 80/20 Principle and how did it come to be?

The 80/20 Principle: The History

The 80/20 principle, also known as the “Pareto Principle”, was invented by an Italian economist named Wilfredo Pareto in 1896, and it serves as the basis of the book “80/20 Principle”, which is loved by many investors due to the messaging it contains, and much of the advice it includes can easily be applied to today’s real estate investment practices.

As a result of his research, the inventor of the Pareto principle Vilfredo Pareto has discovered that 80% of the land in Italy at the time was in possession of only 20% of the population. He decided to test this theory in other areas in his life, like his vegetable garden, and he came to the conclusion that a large amount of the harvest came from only a small number of plants. 

Pareto quickly realized that the 80/20 balance can be observed in many cause-outcome relationships and that there’s a correlation between these numbers which change in relation to each other. This resulted in the earliest version of the 80/20 principle we’re familiar with today.

Contrary to what many might think, the book we’re talking about today was not written by Pareto himself but by Richard Koch, a venture capital investor and an entrepreneur who has discovered the effects of Pareto’s idea, and decided to develop a more profound theory around it.

Koch’s discovery was no coincidence, of course. The 80/20 principle has been influencing the business world for a long time, but what it really means and what investors can take away from it is what you’ll find it in the paragraphs below.

What Does The 80/20 Principle Mean?

Perhaps, you might have come across this principle under different names, such as “the principle of factor sparsity”, or “the law of the vital few”, but they all refer to the same idea. 

Presented in the simplest terms, the 80/20 principle refers to the idea that 80% of your results come only from 20% of your efforts. Following the same logic, we can make the generalization that the rule simply refers to the imbalance between cause and outcome, or effort and yield.

This is why despite the involvement of numbers and percentages, the Pareto principle should be taken more as a general idea, rather than a set-in-stone rule. However, there’s still a lot to take away from Pareto’s theory, especially for real estate investors.

What Can Investors Take Away From The 80/20 Principle?

In the simplest terms possible, the gist of the 80/20 principle for investors is that the 80% of your revenue will be generated from 20% of your properties or deals, but it doesn’t stop there. The principle can also be applied in the sense that 80% of your business-related problems will be caused by 20% percent of your assets, or that 80% of the real estate deals are made by the 20% of the brokers on the market.

Sounds a lot more intriguing now, doesn’t it? However, keep in mind that this 20% specifically refers to the 20% of what you actually put your energy and focus towards. 

Focus is an important component of the principle and the book since the Pareto principle can actually help investors prioritize their commitments and rearrange their focus to maximize efficiency. 

So, how do we apply this rule to our business, and more importantly, how can we use this principle as a guide for our business practices? We simply change and prioritize what we put our focus on. Let’s dive deeper into what this means.

Optimizing Focal Range, Maximizing Efficiency

All of us desire productivity, but only a few of us can actually achieve it. Part of being a real estate investor is compartmentalizing the different areas of your work, such as marketing to grow your business, managing your existing client relationships, analyzing the market, or managing your finances. However, you can’t do everything all at once.

The book theorizes that to achieve efficiency in pretty much all areas of life, you can allocate and prioritize the 20% that is crucial and yields the most benefits, and focus on this 20% to save yourself the time and the effort that would be wasted otherwise.

So, what is the significance of this for investors? 

Let’s say that despite all your equally distributed efforts across several platforms to generate new leads, the majority of the turn-around is coming from a specific platform, such as Facebook Ads or a property listing website. Following the rule, it only makes sense that you place most of your efforts into marketing your business on these platforms. It seems simple enough, doesn’t it?

Let’s go into it a bit deeper.

To give a more general example this time, let’s say that about 20% of your revenue come from 80% of your investments. Does this mean that you simply abandon the rest of your investments that still generate revenue, and don’t waste your efforts? Well, not exactly, because the rule isn’t about cutting corners; rather, it’s about managing your work efficiently by being mindful of your time and most importantly by prioritizing.

This brings us to using prioritization and simplification as a decision-making tool for applying the 80/20 rule.

Prioritization: Making Decision-Making Easier

While the rule itself can help in showing you how to direct your efforts, it may feel like too general of a concept to go any further than that. That’s where the other focus of the book, which is prioritizing, comes into play. 

In the case of an investor who’s remodeling houses, there are many tasks to be done, some of which are not as important as the others. However, taking a good look at these tasks and determining which ones add the most value to the end result, which will be the future listing, can help you decide what to prioritize.

However, as we said, prioritizing doesn’t mean ignoring other tasks that don’t carry the same importance. Simply put, prioritizing is using the effort you put into your work in the most efficient way possible. 

For example, in the digital age, there are various tools that have terrific capabilities, and they help you with many aspects of your work, like managing marketing campaigns, getting motivated seller lists, or even closing deals remotely. Using such tools and automating a portion of your daily processes can help you focus on that remaining 20 percent that matters the most. 

If you’re interested in implementing more automation into your work routine, here’s our post on the best AI tools on the market that can make automatization much easier than you may think.

Pinpointing Problem Areas

Complementing the decision-making aspect, the writer suggests that the rule can also be utilized to pinpoint problems, or areas that need more work. 

The theory comes from the idea that the universe works in much more complex ways than we may think, and that simple cause and effect relationships are not as effective in problem-spotting as we’re taught. 

While this linear way of thinking may be an efficient approach to simple, everyday tasks, it’s not an efficient way to manage your business. Instead, Koch suggests a non-linear way of thinking.

Let’s take a real estate investor who isn’t satisfied with the outcomes of the deals they’re making, and wants to analyze their business to see what can be changed or improved. A linear way of thinking would require them to ask, “what am I doing wrong?”, but a non-linear way to approach this can be asking, “what are the characteristics of the deals that produce the results that I’m satisfied with?”

This can help investors find the commonalities in what they desire, which, in turn, can help them determine what is lacking.

Although it’s a general rule that can be applied to almost every area of life, we still find that following the Pareto principle may prove to be challenging at times. Let’s take a more critical look and share some of our thoughts on the 80/20 principle as we conclude today’s post.

The 80/20 Principle: A Critical Conclusion

Despite the general applicability of the 80/20 principle, we still have to remember that the teachings of the book should be taken with a grain of salt, and the real estate business, or any business for that matter, is too complex for a one-size-fits-all approach. 

Instead of taking the principle at face value, try to think of it as a guide, or a mere suggestion, and plan your business accordingly. Don’t forget; not all rules are set in stone, and every plan needs a little readjusting along the way, which is also what the book suggests.

We have also mentioned other rules you can follow to succeed as a real estate investor in one of our previous posts, such as the 2% rule, or the 50% rule, and the same advice applies to these rules as well.

Another point to mention is that the 80/20 principle is not a mathematical equation. Because there are numbers involved, and because the numbers 80 and 20 complete each other to a total of 100, many people assume that this is an equation. However, the numbers actually represent input and output, and these concepts don’t have a complementary relationship but rather a consequential relationship.

Therefore, it’s good to keep the 80/20 rule in mind as a reminder of the imbalance between the output and the input, which can help you decide what matters the most and what to focus on.

To conclude our post, let’s leave this reminder here. The Pareto principle is a helpful rule that can inspire efficiency, however, it’s always a good idea to readjust the rule to your own life to get the most out of it; this way, you can apply the 80/20 principle to almost any area of your life that can benefit from a bit more efficiency.

 

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