Over a hundred years ago, a bearded Italian named Vilfredo Pareto took an in-depth look at wealth distribution in his home country. Eventually he came across an astonishing finding: 80% of the land in Italy belonged to only 20% of the population.
This seemingly simple observation left a strong legacy. Known as the “Pareto Principle” or the “80-20 Rule,” the idea that 80% of results come from 20% of effort has made waves across multiple industries – from business to computers to sports and beyond yes, even real real estate investment.
How exactly is it? When you look at your investments, you will likely find that around 80% of your returns come from just 20% of your investments. This applies not only to real estate, but also to stocks and funds. At least – quite often.
As a potential or current real estate investor, you also know how much work goes into the actual investment process. Not to mention the maintenance, dealing with tenants and property managers and the eventual sale of the property.
There has to be a better way. Fortunately, this is where the 80-20 principle is most useful.
80% results – 20% of the work
In practice, how is it possible to get 80% of your results with just 20% of the work you are currently doing? I’m sure you’ve heard the phrase “work smarter, not harder”. This principle also comes into play here.
The key is to use a little thing called LEVERAGE.
When most people think of levers, they either think of lifting a giant boulder with a pulley system or they think of debt.
The use of debt is a double-edged sword – it can multiply returns or losses.
Well, my preferred way of leveraging real estate is not using money, but using time.
We are all busy professionals and our most limited resource is TIME. I’m sure there are so many things you would want to do more of “if you had the time”.
How do you use this time for real estate investments?
Active real estate investment
If you own the property, you can save your time simply by hiring a property manager.
Yes, you may lose some total income instead of managing it yourself and taking all calls. However, you can focus your time on other areas: exploring emerging markets, learning new processes, expanding your portfolio, or just spending time with your family.
If you manage yourself and enjoy it, great, keep doing it.
However, if you’re like me, real estate is fun, but not at the expense of my life. It’s a means of getting what I really want – in control of my time, so that I can do the things I love with the people I love.
If you can easily get the most returns on your own, I recommend you reconsider. Let the property managers do 80% of the work and as the owner you can still get 80-90% of the benefits.
In that case, 80% of your results could come from just 20% of your time and effort. Think of it as a kind of return-on-time-and-effort investment. This is one that pays far more than the traditional 100% ratio that comes from 100% effort.
Passive real estate investment
Many people think that the only way to invest in real estate is to own the real estate directly yourself. Real estate investments, however, are a huge and diverse field of investment. There are so many ways to get involved.
One of my favorite ways to invest in real estate is in what I call “passive investments” such as syndications and funds.
Essentially, as a limited partner, you invest in the business of others. They still own real estate, just a smaller percentage of each building.
80-1 rule in passive real estate
Instead of being the 80-20 rule in the Passive Real Estate Rule, I like to call it the 80-1 rule. I believe you can get 80% of the benefits of direct ownership with 1% of the time and effort.
When you invest passively, you continue to enjoy cash flow, appreciation, and tax benefits. You can take full advantage of the operator’s experience, connections, team, capital and TIME while you sit back and wait for distributions.
The part that takes the most time with these types of investments is the initial due diligence phase. Make sure you take the effort to learn how to do this well. Once you’ve invested with an operator, you’re pretty much on your way until it ends. That could be 5-7 years. So who you invest with is important.
This lack of control is why some refrain from making these investments, but for me, the lack of control comes with more free time for me. For a large part of my portfolio, that’s what I invest in.
(If you want to learn how to safely invest in real estate without being a landlord, take a look at this Passive real estate academy.)
Re-focus and re-evaluate
As you go through your current strategies and reevaluate them, pay close attention to which of these strategies will bring you the most income. Keep in mind which of these will take the most time and effort.
You may find that the numbers aren’t exactly 80/20 (or even close together). That’s okay because the principle is the same. In my opinion, it is better to use the Pareto Principle less as a mathematical formula and more as a concept to determine your priorities.
Of course, it’s not a good thing to just throw away an investment just because it takes more than 20% effort. But if you can, make it your goal to eliminate those parts of your life and portfolio that are using more energy than they are worth. Instead, focus on the things that offer the greatest return – both in terms of income and time.
The bottom line is, when it comes to income streams, it may be better to shift focus away from a trickle You have tried hard to keep flowing and on that Flow, You just have to monitor. Then maybe you can add another river and one more.
Learn to use the limited time you have best to get the best results and things will work out.