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? ›
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
What is the 80-20 rule in investing? ›
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.
Where can the 80-20 rule be applied? ›
You can use the 80/20 rule to prioritize the tasks that you need to get done during the day. The idea is that out of your entire task list, completing 20% of those tasks will result in 80% of the impact you can create for that day.
What is the 80-20 rule quizlet? ›
The Pareto principle (also known as the 80-20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. From a business vantage, "80% of your sales come from 20% of your clients".
Why is the 80-20 rule effective? ›
The 80/20 principle can be vital where work needs to be driven by relentless incremental progress. Finding the smaller percentages of actions that can yield the most impact in parallel with a few very big transformations is the key to much of effective risk management.
Is 80 20 a good investment strategy? ›
The 80/20 rule is a concept suggesting that 80% of your results come from 20% of your efforts. This rule can be used in various contexts; however, investing experts caution against using it in portfolio management.
Does the 80-20 rule still apply? ›
This is why the 80-20 rule is usually used in business, but you can also apply it to your personal goals, like finances and spending or even learning a new skill. The 80-20 rule requires you to throw out a few time-honored myths about productivity. First, the myth that everything matters equally – it doesn't.
Once you have identified the 20% of tasks responsible for 80% of effects, prioritise them. These should be the areas that receive the most attention, resources, and effort. Focus on optimising the 20% of causes to increase their impact.
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 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 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.
