Rent-To-Rent Vs Deal Sourcing?
What is your favourite strategy - Rent-to-Rent or Deal Sourcing?
Listen to this podcast episode where I run through five key performance indicators to decide which model has the edge….
In this episode, we will be discussing Rent-to-Rent vs Deal Sourcing. We will go head-to-head to determine which strategy has the edge, which approach I prefer and which strategy you might want to operate.
I’m going to run through five key performance indicators.
Number 1 - Cashflow
Rent-to-Rent provides you with passive, recurring income, which resembles that of a landlord. It’s recurring every month, and contracts are usually between 3 and 5 years.
With deal sourcing, you work, work, work and get paid once. You need to continue to source deals to earn more.
When looking at Cashflow for me, Rent-to-Rent is my favourite business model.
Number 2 - Start-up Costs/Investment
Setting up and becoming compliant, the start-up costs are similar for each business. They begin to differ because if you are securing deals as a deal source, you only need to finance available to view the properties and possibly a marketing budget.
With Rent-to-Rent, you may need to invest capital into a cosmetic refurb once you have secured a deal. My average investment for a Rent-to-Rent deal is between £5-6k.
For investment, Deal Sourcing comes out on top.
Number 3 - Time
At the start of your property business journey, both strategies will take a similar amount of time. However, once you have sourced a deal, you are back to the start, as we have already covered. Whereas Rent-to-Rent, you will be managing tenants, managing the property, it will take more of your time.
I will score this as a tie because although Rent-to-Rent will take more time, you will continue to earn without needed to start the process again.
Listen to the rest of the podcast to find out the final two performance indicators and discover which model will come out on top.
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Podcast Transcript↓
[00:01:08] Simon here. Welcome to another episode of the podcast. And on today's show, we are doing a versus we're going to be putting rent to rent versus deal, sourcing to the test. They're going to battle it out and we're going to figure out which one has got the edge, which strategy I personally prefer, and which strategy you might want to be getting involved in.
[00:01:33] Okay, rarely, rarely interesting stuff. But before we get into that, you know what to do, please subscribe to the podcast to get weekly content every single Monday and big announcement drum roll. As of yesterday, we are live on YouTube. So jump on YouTube, search Simon Smith online and unlock some brand new content.
[00:02:00] We've actually got the trailer up there and we also did a launch party last night. Where you can enjoy a special masterclass on my secrets to rent, to rent after lockdown. So I'll, we'll put a link in the description of this episode in there for you. Please go subscribe, hit the bell button, all that good stuff and get ready for weekly videos.
[00:02:22] And what should you expect from the channel? Well, I'm just going to say for the first time ever, I'm giving access to all areas of my property portfolio, we're doing tours, we're doing viewings. I'm doing tips and hacks on rent to rent, serviced, accommodation, hate HMO, and be all, or, and there's so much amazing content we've been filming.
[00:02:47] I can't wait for you to see it. So Lincoln bio subscribe. And I'll see you there. So onto today's episode, rent to rent versus deal sourcing. And I think the best way to do this is through five key performance indicators. Number one, cashflow, the amount of money you can make and how passive it is. Number two, the investment, the money you need to put into them.
[00:03:12] Number three, the amount of time they take number four, the barriers to entry. You know, how hard is it to get into these strategies and number five scalability, how easy is it going to be to scale these businesses up? So before we get into it, if you're brand new to property or this show let's define the two strategies, rent to rent is instead of buying two, let, instead of buying the property, you don't buy it.
[00:03:41] You just rent it and then rent it out again. And normally the way you do that is you work with motivated landlords. You guarantee their rent for the entire property. You then rent out the property on a room by room basis or on a service accommodation basis for a premium, you pay your expenses, you pay the landlord and then everything else is your profit.
[00:04:07] So you kind of end up. Having a portfolio of these properties you control and you benefit from the monthly cashflow, even though you don't own it, which is fine, very low money down. And it's a great way to get into property deal. Sourcing is where you essentially trade property. You find. Landlords or agents or vendors that are looking to sell their property.
[00:04:33] You secure them, you get them under contract, and then you marry them up with investors that are looking to buy such properties, charging them a fee, and the fee could be two to 3%. And if the property is a hundred grand, you'll make two, three grand, you will introduce them. And then that's your role done?
[00:04:51] You earn once you work, once you move on. So point number one is cashflow. So of course, even from those definitions, you can see that rent to rent gives you the ability to get passive, recurring income, you know, monthly income, which resembles that of a landlord it's reoccurring cashflow every single month.
[00:05:16] For three to five years, which is usually the length of the rent to rent term, whereas deal sourcing you work, work, work, work, and then you'll get paid once. So you have to continue to source more deals in order to earn more. And for me personally, that's why I favored rent to rent. A lot of you don't know, but I actually started off.
[00:05:41] When I ran out of money, I started deal sourcing. And the thing that annoyed me was it reminded me of music. I work, work, work, get paid once. And then after work, work, work, get paid twice and I wanted something more consistent and reliable every single month. And that's why for me, rent to rent provides better cash flow than deal sourcing.
[00:06:05] Now look, it depends. Obviously if you've scale a deal sourcing business, and you've got a whole team sourcing, then that could resemble cashflow, but then we're going really into business realms rather than property investment. Number two is the investment, how much money you need to do, you know, how much money you need to use to make this happen?
[00:06:28] And in terms of startup costs, they're quite similar in terms of the setup. Setting these businesses up and getting compliant. They're, you know, quite similar. However, where it differs is when it comes to doing the deals as a deal sourcer, all you actually need to do is have the money to go view the properties.
[00:06:49] Um, you know, maybe do a bit of promotion, get some, you know, um, investors on board that you might have to invest some money into, but that's about it. Then you monetize them. Where, as on the other hand, rent to rent, once you get the deals, you then sometimes have to invest capital into cosmetic refurbs and you know, my average rent to rent deal, I put about five, six grand in.
[00:07:14] So in terms of the investment, the lower money strategy is deal sourcing. Okay. There's no doubt about it. I have done rent to rent deals where I just put a couple hundred quid in. But they are, you know, they're rare. They're harder to find. Number three is time. How much time do they take? And this is a good question at the beginning when you're finding deals, it's a similar amount of time.
[00:07:39] But once as I've said, once you've sourced on your deal, you're done. That's it. No more time on that deal. No more money either. Whereas rent to rent, you will be managing tenants and managing property and managing the maintenance on those properties. So it will take. More of your time or your team's time on an ongoing basis.
[00:08:01] Whereas generally speaking, once you've made the introduction on a deal that you've sourced, you just babysit the process and then you're out once you get your money and you're out, that's it. So in terms of time, I would say it's, it's, it's a bit of a tie because. Rent to rent will take more time, but you'll carry on earning.
[00:08:23] And once you have got the deals, it is quiet, passive. It is quite passive. If you get your systems, right, however deal sourcing will take the same time at the beginning, but then obviously once you've sourced on no time at all, so make what you will have of those factors. Number four, barriers to entry, which one's harder.
[00:08:45] That's a really, really tough one, because I remember when I started sourcing, it was really, really hard to navigate the process and show investors that these were good deals because I had no track record and half the time I didn't even know what a deal was, you know? So that was one of the reasons why in the end, I was like, I need to do some more deals myself before I feel confident sourcing the mom.
[00:09:12] So barriers to entry is, yeah, it will be hard to get the investors on board in terms of getting the agents on board and sellers on board, as long as you deliver that, that can be quite easy because they just want to sell their house. Rent to rent can be harder because you are persuading. You're selling.
[00:09:33] You're trying to get somebody to trust their biggest asset with you for three to five years. And you're trying to get agents to realize that you're not just going to Nick their landlords and move on. So barriers to entry, I would say it's a little bit harder to do rent to rent because it's more of an ongoing process.
[00:09:58] You know, there's barriers to entry for. Both of them and last but not least scalability, which one's easier to scale. I think both of them are massively scalable. I know deal sourcing companies that don't even source anymore. They commissioned sources all around the country to source deals and then they split the fees with them and they just focus on building massive, massive investor databases and they're killing it.
[00:10:26] Absolutely killing it. But then to the same degree, I've done over 40 rent to rent deals in two years. And the income from the deals allows me to hire a team and to compound the deal was because every single month I could do a few deals now using the cashflow and then that compounds and compounds. And then we invest in the assets.
[00:10:50] So that is that's. Kind of it, you kind of got on mate, your call for me, I've actually gone back to doing deal sourcing now, but I kind of did that because I felt like I had the knowledge and I felt like I had the relationships to have so many deals. It didn't make sense me just saying, no, I might as well sourced them on, but this brings me on to an interesting point.
[00:11:17] In theory, you can source HMO. You can source essay, you can source. Um, B are ours. You can source commercial projects, you can source anything. But one thing I'm not a big fan of is sourcing rent to rent deals. And the reason for this is normally, especially on the HMO side, it takes the investors break even point to beyond the six months period.
[00:11:43] What I mean by that is emotion. Rent to rent deals. You may need to invest in. A cosmetic refurb, pay the deposit, pay the agency fee and say it's five, six grand. And let's say this deal generates a grand a month. Well, all of a sudden, if I had a four grand sourcing fee on. It then takes 10, 11, 12 months for the investor to break even, which is against my criteria, which is why I generally don't.
[00:12:12] Well, I've never sourced a rent to rent deal. I was sourced BDRs. I was sourced HMO's. I would consider sourcing rent to S a just simply because you can get certain essays that might earn two, three grand a month, and maybe you don't need much work, but that's what I would consider if you're going to source.
[00:12:32] And you're going to source rent to rent, make sure that there's enough room in the deal to still do a good job. Um, so overall I love both strategies personally. I think if you want to replace your income and get recurring, consistent income, I think renter rent's the way to go. But I think deal sourcing is a great way to leverage the deals that you can't or don't want.
[00:12:58] To monetize them. And not only that, but what I've started doing is I will also then manage the refurb on behalf of the investor. I will fill the property with tenants or clients, and I will manage the property because I've already got the systems in place for my rent to rent, which is further income streams, and further leverage.
[00:13:19] Hope that's useful. Let me know, DM me on Instagram at Simon's before line, let me know which strategy you prefer. Make sure you check the link in the description of this podcast to subscribe to the YouTube channel, um, loads of content come in there and I will see you next week. Thanks.
[00:13:50] Thanks for listening. For more information, check out Simon Smith, online.com. See you next time.