Pareto-fying Your Property Management Business

2015-07-18

Pareto-fying Your Property Management Business

20% of these words will capture 80% of your attention.

A graph illustrating the Pareto PrincipleIf you’re not familiar with the Pareto Principle, it goes like this: 20% of sources cause 80% of effects. It started when a mathematician in Italy named Vilfredo Pareto calculated out that 80% of the land in Italy was owned by 20% of the people, and (according to unconfirmed legend) later noticed that 80% of the peas in his garden came from 20% of his plants. The Pareto Principle, a.k.a. the 80/20 rule, is today an absolutely standardized formula in many aspects of the business world. You’ll hear this expressed in several different ways:

 

  • 80% of your customer service time is spent dealing with 20% of your customers;
  • 20% of the tools in your toolbox will fix 80% of the things in your house;
  • 1/5th of drivers cause 4/5ths of accidents;
  • And so on.

 

Of course, this isn’t a law of nature; it’s ‘merely’ a frequently-observed statistical phenomenon; the number of cases where it seems to apply are far more prevalent than random chance would suggest. Nonetheless, there’s a critical lesson in here for property managers, and it’s all about deliberate evolution of your business.

 

Pareto vs. the Suck

There are just four simple things that make life as a PM awful:

  1. Property owners that don’t understand what they — or you — are doing.
  2. Properties that are destined for failure for any number of reasons.
  3. Tenants that refuse to play by the rules.
  4. Contractors that don’t do what they are supposed when it needs to be done.

But the Pareto Principle tells us that there are essentially three categories of each of these things:

  1. The 20% of troublemakers that cause 80% of our problems,
  2. The 20% of angels that cause 80% of our beaming smiles (and profit!), and
  3. Everyone else.

Knowing that this are the case, we can get to the business of identifying what makes for a 20%er, and how to avoid the bad 20% and find more like the great 20%.

 

The Pareto-fication Process

To make use of the Pareto Principle, you need to start by actually sorting out your clients, properties, and tenants.

  • For every owner-client, ask yourself how much time you’ve had to spend explaining things, how much time you’ve had to spend convincing them to do the right thing, and how much money you make from them each month. Then sort them by “time consumed-to-profit made”, and see what correlations you can draw between the bottom 20% and the top 20%.
  • The same basic equation works for tenant-clients, but work the amount of hassle it’s been to get them to pay rent, the amount of time you spend listening to their complaints and the amount of maintenance costs they’ve caused into the formula.
  • For properties, you’ll need to put in a little extra effort to separate out the effects of the tenants — don’t downgrade a house because of one bad tenant, but at the same time, if a property only seems to attract awful tenants, it could well be an attribute of the structure or the neighborhood that’s at fault – things you can’t easily cure.

 

Once you’ve got these groups sorted out, the goal is to figure out what similarities each of these groups have in common. This isn’t a legal process, so don’t feel any need to be politically correct — if it turns out that for some reason, most of the top 20% of your tenants are single or every one of your worst properties is next to a business, take note of that fact and move on.

For each quality that your 20%ers share, ask yourself if it’s reasonable that the quality could contribute to their success or failure. Cross off the ones that make no sense, and take a hard look at the remainder. Once you have that list, you have what amounts to a ‘filter’ you can use to guide your future actions.

  • If your top 20% of owner-clients are all from overseas and the bottom 20% are all local, consider making a policy of not taking in local clients: they may simply not be worth the headache.
  • If your bottom 20% of tenants work in unusual circumstances (on commission, from home, as entrepreneurs) and the top 20% have regular, moderate-to-high-paying jobs, consider making regular employment a prerequisite for tenancy on your properties.

 

As much as it feels counterintuitive and difficult to turn away someone who wants your business, learning to Pareto-fy your property management business will go a huge distance toward reducing your stress level, improving your income, and helping you love your job.

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