The 80/20 Principle in Real Estate Investing

by Brandon · 6 comments

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What does the name “Pareto” mean to you?

Probably very little. However, the principle made famous by an Italian economist over 100 years ago has a huge impact on your investing techniques and wealth building ambitions.

“Pareto’s Principle,” also known as “the 80/20 Principle,” states that for many areas of life, 80% of the effects come from 20% of the causes. For example, Pareto noticed that 80% of the land was owned by 20% of the population and 80% of the peas in his garden were produced from 20% of the plants. You can see examples like this throughout nearly every field of study in our world, especially in business.  Often times, the ratio is even more staggering.

So what does this mean for a real estate investor?

Pareto’s Principle is useful in encouraging focus on productivity and results-driven business. As a real estate investor, this principle helps to find what areas of our business are really earning income and which areas are simply wasting time. Many of the activities that an investor performs on a daily basis are probably wasted time. By focusing on the 20% of the actions that are providing the most results, we can free up significant amounts of time to do the kind of things we want to do. This is key is beginning to “hack” real estate.

Several years ago I realized that most of my efforts were spent doing small maintenance jobs that seemed to take all day. By hiring a resident manager to take over the maintenance, I was able to gain 80% more time in my life – time that I now spend looking for deals, spending time with my wife, and blogging at RealEstateInYourTwenties.com.

Let’s look at a few more specific examples.

  • If you are trying to find leads for motivated homeowners looking to sell, what sort of action is getting you the most results? Are you spending most of your time putting up bandit signs when a simple Craigslist ad is driving most of your business?
  • If you are remodeling a home, what upgrades are actually contributing the most to the future value of that home?
  • If you are managing a small apartment building, what advertising methods are getting you the most calls?
  • Is 80% of your wealth being built by simple investing? Why are you wasting time with wholesaling deals?

What to do with Pareto?

Now that you have begun to think in these terms, its time to begin focusing on improving those areas of your business. If Craigslist is driving most of your leads – then focus your efforts on making your Craigslist ads even better. If new carpet will cause the most significant increase in value or speed of sale -get great looking carpet! Improve the things that matter and watch your investments take off.

I am not suggesting you quit all your other activities if they are not bringing you the most leads or income.   Often times, things that don’t seem to produce much income actually help in other ways. The important thing is to know what your efforts are producing – and prioritize based on that. Don’t waste time if you don’t need to.  The key is being aware of how you are spending your time.

It’s all about finding what works and maximizing those causes to explode your results. Your time is precious, and by looking for ways to increase your efficiency you can free up your time to do the kind of things you want to do. Only then are you truly living life on your terms, the goal of any real estate hacker.

P.S. If you want to learn more about the 80/20 Principle – check out Tim Ferriss’ book “The Four Hour Workweek”. While not a real estate book, the principles taught are invaluable to a real estate investor looking for more time to live to the fullest.

About Brandon

has written 199 Awesome posts in this blog.

Brandon Turner (G+) is the BiggerPockets.com Senior Editor and Community Director and owner of RealEstateInYourTwenties.com. He is also an Active Real Estate Investor (Flips, Apartments, and Buy-and-Hold), Entrepreneur, World Traveler, Third-Person Speaker, and Husband. Come hang out with him on Twitter!

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

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{ 5 comments… read them below or add one }

Lance@MoneyLife&More May 27, 2012 at 5:31 pm

These are great points. The Parteo principle definitely can help when applied to most items. I learned it while I was in college and should probably start applying it.

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Brandon May 27, 2012 at 6:11 pm

It really does make a difference when you can shift your thinking that way. I can’t help but do it in every area of my life now! Probably not good in every area … (lets see, if I get 80% of love and respect from my wife giving her roses and only 20% from doing the dishes, maybe I should stop doing dishes and give more roses…)

😉

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Al Williamson May 28, 2012 at 9:51 pm

Brandon,
I’m a new reader. Nice article. Careful with 4-Hour Workweek, it’s a dangerous book for those living the status quo. It completely wrecked my plan to work, retire then play.

I’m much happier with mini and pre-retirement adventures.

Anyway, claiming control over your time and energy can not be overstated. Thanks for the reminder.

Reply

Brandon May 28, 2012 at 10:27 pm

I know, right! The Four Hour Workweek totally changed the way I run almost every part of my life! I think it made me work more, ironically, but in a different direction and much more focused. Thanks for stopping by Al!

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Affordable residential properties Gurgaon November 22, 2012 at 7:39 am

Thanks for sharing the wonderful tips.

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