While I sometimes like to get things just right — that’s the optimizer in me — most of the time, good enough will give you what you need, and it’s a lot easier to achieve “good enough” than it is to achieve perfection.
While the title of this article and the principle it’s based upon suggest it takes only 20% of the effort to do good enough, Dr. Peter Kim believes the true number is closer to 1%.
What shortcuts can you take to invest in real estate with 80% to 99% less effort than the pros? Let’s see what Dr. Kim has to say.
This post originally appeared on Passive Income M.D.
Over a hundred years ago, a bearded Italian man by the name of Vilfredo Pareto looked closely at wealth distribution in his home country. Eventually, he came across a stunning realization–80% of the land in Italy was owned by just 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 the effort has made big waves in multiple industries–from economics to computing to sports, and yes, even real estate investing.
How does it apply, exactly? Well, if you look over your investments, you’ll likely discover that around 80% of your returns are brought in by just 20% of your investments. This is true not only of real estate but of stocks and funds as well. At least–quite a bit of the time.
But as a potential or current real estate investor, you’re also familiar with how much work goes into the actual investing process. And that’s not to mention the upkeep, dealing with tenants and property managers, and eventually, possibly selling the property. How is it possible to achieve 80% of your results from only 20% of the work you’re currently doing? The Pareto Principle comes into play here.
There has to be a better way. Fortunately, this is exactly where the 80-20 principle is the most useful.
80% Results – 20% of the Work
How, in actual practice, is it possible to achieve 80% of your results from only 20% of the work you’re currently doing? Well, I’m sure you’ve heard the phrase “work smarter, not harder.” That principle comes into play here as well.
The key is to use a little thing called LEVERAGE.
When most people think of leverage they think of either lifting a huge boulder with a pulley system or they think of debt.
Using debt is a double-edged sword – it can multiply returns or losses.
Well, my favorite way to use leverage in real estate is not to leverage money but to leverage time.
We’re all busy professionals and our most limited resource is TIME. I’m sure there are so many things you’d want to do more of “if you had the time.”
So how do you leverage that time in real estate investments?
Active Real Estate Investing
If you own the property, you can leverage your time by simply hiring a property manager.
Yes, you may lose out on some overall income versus managing it yourself and taking all the calls. However, it allows you to focus your time elsewhere: researching emerging markets, learning new processes, growing your portfolio, or simply spending time with your family.
If you’re self-managing 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 vehicle to get me what I truly want – control of my time so I can do the things I love with the people I love.
If you’re simply self-managing to squeeze out the most returns, I encourage you to reconsider it. Let the property managers handle 80% of the work and as the owner, you’ll still reap 80-90% of the benefits.
In this case, 80% of your results could come from just 20% of both your time and effort. Think of it as a kind of return-on-time-and-effort investment. That’s one that will pay off far more than the traditional ratio of 100% results from 100% effort.
Passive Real Estate Investing
Many people think that the only way to invest in real estate is to directly own the properties yourself. However, real estate investing is a huge and varied investment field. There are so many ways to get involved.
One of my favorite ways to invest in real estate is through what I call “passive investments” like syndications and funds.
In essence, you’re investing in other’s deals as a limited partner. You still own real estate, just a smaller percentage of each building.
80-1 Rule in Passive Real Estate
Instead of it being the 80-20 rule in 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.
By investing passively, you still participate in the cash flow, appreciation, and tax benefits. You get to take full leverage 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 period. Make sure you make the effort to learn how to do this well. Once you’ve invested with an operator, you’re pretty much on the ride until it ends. That could be 5-7 years. So it matters who you invest with.
This lack of control is why some steer away from these investments, but for me, the lack of control goes hand in hand with more free time for myself. So for a large part of my portfolio, it’s what I invest in.
(If you’re interested in learning how to confidently invest in real estate without being a landlord, check out Passive Real Estate Academy.)
Refocus and Reassess
As you go through your current strategies and reassess them, pay close attention to which of those strategies are providing you with the most income. Along the way, keep in mind which of those are requiring the most time and effort from you.
You may very well find that numbers aren’t exactly 80/20 (or maybe even close). That’s okay because the principle is the same. In my opinion, it’s better to use the Pareto Principle as less of a mathematical formula, and more of a concept to guide your priorities.
Of course, it’s not good to simply toss out an investment simply because it requires more than 20% effort. But if you can, make it your goal to eliminate those parts of your life and portfolio that are taking up more of your energy than they’re worth. Instead, shift your focus to those things that offer the greatest return–in both income and time.
The bottom line is this: when it comes to streams of income, it can be better to shift your focus away from a trickle you’ve been struggling to keep flowing, and onto the river, you simply need to oversee. Then, maybe you can add another river and another.
Learn to leverage the limited time you have best to produce the greatest results and things will work out.
2 points per dollar spent (2% cash back equivalent). Up to $300 credit each year for travel booked on Capital One Travel, 10,000 bonus miles each account anniversary ($100 value). Unlimited Priority Pass Lounge Access, $100 Global Entry or TSA Pre✓ credit. $395 fee can be more than offset with travel credit & annual point bonus