091: Living by the 80/20
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If you could get a redo on your life, what would you do? 🤔🤔
Take a second and think about it…do you ever feel overwhelmed or even powerless? Do you feel like you have to put your head down and trade more hours for dollars? Or that you have to do everything yourself?
If so, maybe it’s time to think about how you would redo your investing. And that’s okay – we are here to help! 🙌
There’s a rule out there that just might help shift your thinking. If you’ve been hanging around the world of investing, you’ve probably heard of it – the 80/20 Rule. You might be thinking, the 80/20 rule is not a new buzzword and not a new idea by any means. Today, we’re going to examine what it means to us as investors.
Not only that, but we are also going to discover how it actually could make 80% of your work disappear while still getting the piece of the pie.
The Man Behind the Concept
Let’s take a look at a little history to help us understand where this whole concept came from. Vilfredo Federico Damaso Pareto was born in Italy in 1848. You might recognize his name as a renowned economist and even a philosopher. 🤓🤓
Legend has it that one day he was out in his garden (probably thinking philosophical deep thoughts), and he noticed that 20% of his peas were producing 80% of the total produce.
You might be wondering what garden peas have to do with investing – hang tight with us for a few. Basically, this moment caused him to think about the idea of uneven distribution, and how at the time, 80% of the land in Italy was owned by 20% of the population. 😲😲
It turns out that after digging into this deeper, the same concept applies across a variety of industries and applications – from land to sales to employee performance, even down to what apps you use (to be clear, this last one was not part of his discovery in 1848).
What Pareto discovered became a larger generalization that we still know and use today 〰️ 80% of results will come from just 20% of the action.
➡️ This has become known as the Pareto Principle, and it is widely used in business management.
The principle also has applications in other practices, such as medicine; in fact, when it comes to disease, about 20% of infected individuals are actually responsible for spreading 80% of disease, including COVID-19. 😊😊
If you think about it, the implications are staggering. What is your input? How about your output? What 20% of your wardrobe do you wear 80% of the time? Without getting all Marie Kondo on you, this can have some pretty serious implications on your wardrobe – and it might be time to get that donation box out of the garage.
This principle not only applies to work productivity, but it also applies to investing! 🤩🤩
We totally agree with this principle in so many ways, but today, we want to talk about the 80/20 rule with a slight twist. We believe that the 80/20 rule proves that multifamily apartment investing is the best investment vehicle.
The 80/20 Rule and Multifamily Apartment Syndications
Here in the Kitti Kingdom, we’re big on The Financial Formula – which is optimization, maximization, and systemization.
And often ask ourselves “how do we magnify the output, with small input?” AKA how do we get the most while doing the least?
As a refresher, in multifamily apartment syndications, there are two types of investors, active investors AKA general partners or sponsors, and then there are passive investors or limited partners. 😘😘
As the name would suggest, the role of the active investor is to be active.
This means they throw 💯% of their efforts towards sourcing the properties, building a relationship with the broker and/or seller, securing the best loans, raising capital, hiring the best property management team, implementing a sound business plan, communicating with their investors, and asset managing the property to maximize its return potential.
Competition is fierce 🙏 , so active investors may be looking at hundreds of deals before the right one is discovered, and even then there’s no guarantee that we’ll win the deal.
We spend hours upon hours on a daily basis talking to brokers, underwriting properties, touring them, etc., and this is all done before we even raise a penny from our investors. Needless to say, there is a lot of upfront work that happens way before a property is purchased.
For some context, at the Kitti Sisters, our team spends 365 days per year working to purchase properties. In 2021, we were able to purchase 3 large apartment complexes with a total value of over $80M.
If you take the 40 business hours per week times 12 months, that’s over 480 hours per year. And that’s just what’s on the front end, this doesn’t include the 3 to 5 years after the purchase that we manage the asset every single day. 😉😉
So, for the three properties, we purchased in 2021, we’ll spend another 480 hours x 5 years to manage them. That totals 2,880 hours to manage all the assets we have under management. Let’s be clear, this isn’t 2,880 hours from one person; obviously, we have a dedicated team that is hard at work, with at least 6-10 other people. Yes, we work very hard to make sure we do our best to ensure our investors are happy with their investment performance.
On the flip side, passive investors also have some upfront work that they have to do. This includes vetting out the general partnership team that they want to invest with and reviewing ▶️ The C.A.R.E. Strategy that we’ve gone over in previous episodes.
But ultimately, we estimate that it should take a passive investor 3-4 hours max to complete all the necessary steps to invest in multifamily apartment syndication.
Once you’ve done the work one time of vetting the sponsorship team properly if the team has another deal you don’t have to vet them again if you already trust and know they’ve got something that could pique your interest. Once you’ve found your team, you can trust them to create your wealth-generating machine 24/7.
3-4 hours vs 2,880 or more…sounds like a bit of an imbalance in the favor of the passive investors right?
✨ The compensation has also skewed that direction; for 0.10% effort, the passive investors get to take home 80% of the profit‼️
Who wouldn’t take this type of compensation structure? We know that 100% of you guys all raised your hand if not both hands.
Let’s look at this in the context of businesses. 🔽
Typically, businesses with partners have varying degrees of partnerships, and the compensation structure will reflect this.
In the first scenario, you own the factory that produces unicorn cotton candy 🍭, and your business is thriving, but you need to bring in some partners so that you can expand your manufacturing capacity.
So you go to a few people you know and say hey Mary and Samantha, would you be interested in joining my company as silent partners, you can put in x dollars and we’ll split the profit 80% for you because you are doing all the work and you have the experience and expertise to keep growing the business, while Mary and Samantha will get 20% of the profit. Since Mary and Samantha are not doing anything to run the business day to day, they say yes, because 20% profit for doing virtually nothing is pretty much an infinite return.
Again, for multifamily apartment investing, the 80/20 rule applies in the inverse.
You see, you do 0.10% of the work; however, you are able to receive 80% of the profit. That’s a pretty amazing deal if you ask us!
In our opinion, there aren’t a lot of asset classes that give passive investors this type of profit-share structure. As a matter of fact, we would love to be passive investors for life.We wouldn’t want to deal with any rowdy tenants or lift a 🖌️ paintbrush ourselves. 😅😅
We have a friend who’s a pretty big-time private equity founder. His job is to go find businesses that he can take over and help improve so that he can later sell them for a huge profit.
When we described multifamily apartment syndication’s compensation structure, he scoffed at us and said, “now why in the world would I do that?” In another type of investment, the active investor or general partners are the ones who get 80% of the profit, the passive investors only get 20%.
We think Jeff Patton said it best – “at the end of the day, your job is to minimize output, and maximize outcome and impact.”
That sounds so simple, but it’s SO powerful‼️
Passive investing through apartment syndication is an amazing way to create wealth without having to do all the work and get alllll the benefits. Have your cake and eat it too? Make it red velvet, and we’re in! 💪💪
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