Using the power of Pareto to build a property portfolio
Many investors with a property portfolio also have a full-time job, certainly, when the portfolio is at the early or growing stage. However, as the portfolio gets larger, and properties within it begin to mature, the property investor finds that Pareto’s Principle applies to property investment in the same way that it applies to their full-time job: 20% of effort produces 80% of the return (and conversely, 80% of effort produces just 20% of return).
Pareto and property investment
With that fledgling property portfolio, the likelihood is that it won’t (yet) be producing enough income for you to give up work. You’ll still have that full-time job or a business that produces the majority of your income. This dynamic will probably change quite quickly, though, and you’ll have Pareto to thank.
I’m going to make a couple of assumptions showing you how Pareto works in property investment. The first is that you spend ten hours every week researching property investment opportunities and speaking to your property manager. If you don’t have a property manager, then you will probably spend at least twice this amount of time on your property portfolio.
For assumption number two, let’s say you have a property portfolio of eight properties, each of which produces £1,000 per month in rent. That’s a total of £8,000.
In your full-time job, let’s assume you earn the average wage of around £27,000 per year or £2,250 per month.
Your total monthly income is £10,250 per month, and your income breakdown looks like this:
- 43 hours per month produces £8,000 per month (20% of time for 78% of gross income)
- 173 hours per month produces £2,250 per month (80% of time for 22% of gross income)
Of course, there will be taxes and costs to pay on your income, but don’t forget that any increase in property value also adds to wealth (and makes it easier to add to your property portfolio). The result is a ‘Pareto property portfolio’.
Building a Pareto property portfolio
Of course, when your property portfolio is small, and you’re just starting out, you’ll be spending more time comparatively on your property investment business. But with each property addition, you’ll be taking another step towards a Pareto property portfolio. Eventually, it will be producing 80% of your income for 20% of your time. That’s when you might decide to give up your job and live the lifestyle you want.
Pareto and property management
Pareto can be applied to anything: 20% time or effort = 80% return. It’s the same in property investment: the time spent on researching and sourcing the best investment opportunities is what produces the greatest return, while the most amount of time and effort required in managing the property producing a lower return.
That’s why the best property investors concentrate their efforts on analysis and due diligence, passing on the responsibility for day-to-day property management to others.
Please feel free to contact us by phone (+44 1522 503 717) for information about our services.
Yours in effortless property management,
Brett Alegre-Wood MARLA MNAEA