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 80-20 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 best explanation of the 80-20 rule? ›
The Pareto principle states that for many outcomes, roughly 80% of consequences come from 20% of causes. In other words, a small percentage of causes have an outsized effect. This concept is important to understand because it can help you identify which initiatives to prioritize so you can make the most impact.
What is the 80-20 rule in value investing? ›
The 80-20 Rule in Business and Investments
For project management, the first 20% of the effort put in on a project should yield 80% of the project's results. Thus, the 80-20 rule can help managers and business owners focus 80% of their time on the 20% of the business yielding the greatest results.
Is 80-20 a good investment strategy? ›
If you're a younger investor with a long time horizon and are comfortable taking on more risk, the 80/20 portfolio may be a good fit. However, if you're closer to retirement or prefer a more conservative approach, the 60/40 portfolio may be a better option.
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".
How to apply 80/20 rule? ›
Steps to apply the 80/20 Rule
- Identify all your daily/weekly tasks.
- Identify key tasks.
- What are the tasks that give you more return?
- Brainstorm how you can reduce or transfer the tasks that give you less return.
- Create a plan to do more that brings you more value.
- Use 80/20 to prioritize any project you're working on.
YOUR BUDGET
The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments.
What does the 80-20 principle mean in real terms? ›
The Pareto principle, also known as the 80/20 rule, is a theory maintaining that 80 percent of the output from a given situation or system is determined by 20 percent of the input. The principle doesn't stipulate that all situations will demonstrate that precise ratio – it refers to a typical distribution.
The 80-20 rule is the principle that 20% of what you do results in 80% of your outcomes. Put another way, 80% of your outcomes result from just 20% of your inputs. Also known as the Pareto principle, the 80-20 rule is a timeless maxim that's all about focus.
How do you take advantage of the 80-20 rule? ›
How to use the 80/20 rule
- Examine all of your daily or weekly tasks.
- Prioritize your most important tasks.
- Identify the tasks that offer the greatest return.
- Brainstorm how to delegate or remove tasks that give less return.
- Make a plan that outlines time and resources versus prioritized tasks.
suggests that roughly 80% of effects come from 20% of causes. This principle has found applications in various fields, offering valuable insights into productivity, resource.
What is the 80-20 rule in real estate? ›
In the realm of real estate investment, the 80/20 rule, or Pareto Principle, is a potent tool for maximizing returns. It posits that a small fraction of actions—typically around 20%—drives a disproportionately large portion of results, often around 80%.
What are the disadvantages of the 80-20 rule? ›
However, limitations include oversimplification, potential neglect of less frequent but impactful issues, and the need for accurate data to identify the vital few factors. Balancing the 80/20 principle with a comprehensive understanding of the entire system is crucial for effective and holistic quality improvement.
What is the 80-20 rule wealth? ›
The 80/20 Rule means that in any situation, 20 percent of the inputs or activities are responsible for 80 percent of the outcomes or results. In Pareto's case, it meant 20 percent of the people owned 80 percent of the wealth.
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 50 50 rule in real estate? ›
What Is The 50% Rule? The 50% rule is a guideline used by real estate investors to estimate the profitability of a given rental unit. As the name suggests, the rule involves subtracting 50 percent of a property's monthly rental income when calculating its potential profits.
What is the 90 10 rule in real estate? ›
He explained how investors can leverage strengths in one area to complement others, fostering balanced and effective partnerships. Roger shared his 10/90 rule, balancing risk by investing 10% in higher-risk projects and 90% in stable, cash-flowing properties.
What is the 5 rule in real estate investing? ›
The first part of the 5% rule is Property Taxes, which are generally around 1% of the home's value. The second part of the 5% rule is Maintenance Costs, which are also around 1% of the home's value. Finally, the last part of the 5% rule is the Cost of Capital, which is assumed to be around 3% of the home's value.
