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The 80/20 Rule in real estate investing: 80% of the income for 20-50 percent of the work & hassle

I'm in love with the idea of exploiting inefficiencies! I eat up books like The Four Hour Work Week by Tim Ferris, who talks about concepts like Pareto's Principle:

Pareto's Principle states that for many events, 80% of the "effects" come from 20% of the "causes." For example, 80% of a company's profits might come from 20% of its clients. 80% of your joy in life might come from 20% of the activities you partake in, etc. Every year, I went through my landscape client lists and found the ones that failed to make the "20%" (for several benchmarks, including profitability), and I increase their prices a bit. After a few years of doing this, I no longer have an 80-20 scenario, it's very close to fifty-fifty, which is ideal. (50% of our results come from 50% of our actions).

There are opportunities like this throughout our lives, personal as well as business. I've found a similar phenomenon in my real estate investing. Like I spoke of earlier, it's common to categorize the quality of buildings into three basic classes: A, B or C.

Most landlords I've talked to make the most money with class C properties. For one thing, they tend to be cheaper: You can pick up class C properties around here in 2014 for $10,000 - $20,000 per unit with many single-family homes going for under $30,000. They need work, but they're very simple construction and by the time these landlords are done, they have "brand new" quality for less than $25,000 per unit. Class C rents are really about the same as class B, despite class C being less desirable. I don't know why for sure, but I'm guessing it has something to do with supply and demand. Most of the tenants don't "qualify" for the class B areas, so class C landlords can charge a premium. So combine cheaper properties with market level rents, and you have a very profitable situation.

But with class C, you also have a lot more work: More evictions, more phone calls, and more complaints. Many of these tenants have to lie to the landlord even to get accepted, giving false references, false rental history, etc. Many are being evicted from one apartment at the same time they're applying for their next. All in all, it can be a lot more of a hassle. The money's good, believe me: We have two class C properties we bought as "experiments," and we never had problems filling them. We had many problems afterward though! In the end, we actually "converted" them. We now have class B tenants living in our originally class C properties. It was a lot of work. I wouldn't necessarily recommend it unless you like a good challenge. I despise a good challenge (in most cases), and I'm not ashamed to admit it!

Takeaway: What I discovered is that by buying B class properties and staying current with maintenance, you can make almost as much money (eighty percent) for less than half the work and hassle of a low-income investor. If you want to learn more, see our purchase options below. We think you'll earn back the money you spent on this package with your first deal.


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