The 80-20 rule is also known as Pareto’s Rule, Pareto’s Principle, the law of the vital few or the principle of factor sparsity. The rule, applicable in many financial, commercial, and social contexts, states that 80% of consequences come from 20% of causes.
For example, many researchers have found that:
- 80% of real estate deals are closed by 20% of the real estate teams.
- 80% of the world’s wealth was controlled by 20% of the population.
- 80% of a typical business’s revenue comes from 20% of its clients.
The 80-20 rule reflects the unequal distribution of outputs and can be used to determine the best way to focus efforts. However, it’s important to note that the rule is not a mathematical concept and doesn’t apply in every situation.
The Origins of the 80-20 Rule
In the early 20th century, Italian economist Vilfredo Pareto was the first to describe the 80-20 rule. During this time, the distribution of wealth in Italy was a cause for concern. Pareto noticed that 20% of the Italian citizens owned 80% of Italian real estate. As he examined real estate ownership in other countries, he discovered a similar pattern. Later, Dr. Joseph Juran, an operation management expert, examined the law and found that it applied to various business and productivity contexts. Applying the rule to business production, he demonstrated that 20% of the problems in production methods were responsible for 80% of the defects in products. He then postulated that if 20% of the problems identified were addressed, the overall production could be increased.
A Closer Look at Pareto’s Principle
Although often misinterpreted and misrepresented, the 80-20 rule has nothing to do with mathematics. Some people have tried to make mathematical arguments about the rule — especially after considering that 80% + 20% equals 100% — but inputs and outputs are two different values. The cumulative value of input and output doesn’t need to equal 100. Also, the 80-20 rule doesn’t apply in every case. Sometimes, the ratio may be 95/5, 70/30 or something else entirely. The main point is to know such disparities exist and to think of how to use that information wisely.
However, the 80-20 rule is an invitation to examine where the highest profits or losses, productivity or lack of it and resources are being deployed. When the 80-20 rule is used in businesses, it is easy to identify what works and what doesn’t. For example, if 80% of your profits come from 20% of your real estate investments, then you should focus on that investment type. The 80-20 rule in real estate investments can help you identify your most valuable clients or partners. It can help you determine where you should concentrate efforts and where divesting might be the best plan.
FAQs
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.
What is the 80-20 rule in real estate investing? ›
What is the 80/20 Rule exactly? It's the idea that 80% of outcomes are driven from 20% of the input or effort in any given situation. What does this mean for a real estate professional? Making more money in real estate is directly tied to focusing your personal energy on the most high value areas of your business.
What is the 80% rule in real estate? ›
For example, if 80% of your profits come from 20% of your real estate investments, then you should focus on that investment type. The 80-20 rule in real estate investments can help you identify your most valuable clients or partners.
What is the 80-20 rule of investing? ›
The 80-20 rule can be applied to investing in different ways. One way is to allocate 80% of your portfolio to low-risk, diversified assets, such as index funds, and 20% to high-risk, high-reward assets, such as individual stocks or cryptocurrencies.
What is the 80-20 investment strategy? ›
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
What is the 80-20 rule real examples? ›
80% of crimes are committed by 20% of criminals. 80% of sales are from 20% of clients. 80% of project value is achieved with the first 20% of effort. 80% of your knowledge is used 20% of the time.
What is the rule of 20 in real estate? ›
"Possession" requires more than incidental benefit from the public property, but requires actual physical occupation of the property pursuant to rights not granted to the general public; thus, the use of property such as hallways, common areas, and access roads at airports, stadiums, convention centers, or other public ...
What is the golden rule of real estate investing? ›
It was during this period that Corcoran developed what she calls her "golden rule" of real estate investing. This rule calls for investors to put 20% down on properties and then get tenants whose rent payments cover the mortgage.
What is the number one rule in real estate? ›
It states that the monthly rent of a property should be equal to or greater than 1% of the total investment in the property. The 1% rule can help you quickly screen properties and compare them based on their rental income potential.
What are the 5 golden rules of real estate? ›
Summary. If you follow these 5 Golden Rules for Property investing i.e. Buy from motivated sellers; Buy in an area of strong rental demand; Buy for positive cash-flow; Buy for the long-term; Always have a cash buffer. You will minimise the risk of property investing and maximise your returns.
The Pareto principle (also known as the 80/20 rule) is a phenomenon that states that roughly 80% of outcomes come from 20% of causes. In this article, we break down how you can use this principle to help prioritize tasks and business efforts.
How do you set goals with 80-20 rule? ›
According to this principle: 20 percent of your activities will account for 80 percent of your results. It can change the way you set goals forever. If you have a list of ten items to accomplish, two of those items will turn out to be worth more than the other eight items put together.
What is the 80-20 rule wealth? ›
He famously observed that 80% of society's wealth was controlled by 20% of its population, a concept now known as the “Pareto Principle” or the “80-20 Rule”. The Pareto distribution is a power-law probability distribution, and has only two parameters to describe the distribution: α (“alpha”) and Xm.
What is the 5 rule in real estate investing? ›
That said, the easiest way to put the 5% rule in practice is multiplying the value of a property by 5%, then dividing by 12. Then, you get a breakeven point for what you'd pay each month, helping you decide whether it's better to buy or rent.
What is 10 10 20 rule real estate? ›
While some agents swear by the 10-10-20 rule — knocking on doors that are 10 to the left, 10 to the right, and 20 across the street — the key is less about the exact number of doors and more about getting out there and spreading the word about your open house.
What is the 1 rule in real estate investing? ›
The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.
