How Lease Rental Discounting Works as a Financing Option?
In the current financial environment, property owners are continually searching for creative ways to capitalise on their asset values, without losing ownership. One financing process to do the same is Lease Rental Discounting (LRD). This involves taking advantage of the rental income from a property being leased.
It allows the owner to receive a financial advantage in cash without selling the property or pursuing more traditional Loans. However, how does this actually work? What do you need to know prior to consideration? This blog helps you understand exactly that.
Understanding Lease Rental Discounting
Lease Rental Discounting is essentially a Loan ascertained by future rental income from a property leased. The unique basis of the Loan is that, rather than pledged property, the lender is discounting the future rental income stream the property generates over time. This method is especially common for commercial properties, which tend to have clear lease agreements with reputable tenants. Here’s the entire process of an LRD:
- Property Ownership and Rental Income
You must be the registered owner of the property that is rented to a tenant through a legally binding contract that guarantees you a rent that is the totality of the Loan application.
- Evaluation by the Lender
When a lender ascribes LRD, a bank or NBFC assesses the property based on the terms of the lease, the tenant’s credibility, the duration, the rental amounts, and the property location. This allows them to estimate an LRD based on reference to the present discounted value of the anticipated future rental stream.
- Loan Amount Determination
Taking the evaluation into consideration and determining the overall risk, the lender will offer you a Loan amount based on a percentage value (often 70% or 80%) of the discounted rental income.
- Disbursement and Repayment
Typically, The Loan is funded in totality with the option of a single lump sum or in any agreed-upon instalments. After the Loan is granted, your tenant would usually rent directly to an Escrow Account with the lender. The lender would withdraw the Loan EMIs (Equated Monthly Instalment) from the Account and pay you the balance.
Key Benefits of Lease Rental Discounting
Here are some advantages of Lease Rental Discounting:
- Immediate Liquidity Without Selling: You get access to money without losing ownership of your property. This is useful as you may need capital for business expansion, renovations, or to just manage your other financial needs.
- Competitive Interest Rates: Your Loan will most likely have lower interest rates than Unsecured Loans or even some traditional Loans because they are secured by rental income.
- Longer Repayment Tenures: LRD Loans typically have repayment periods associated with the lease term, usually about 5 to 10 years. This extended tenure can ease monthly repayment burdens.
- Retention of Ownership: Furthermore, you still own the property, so any appreciation of the property’s value is yours.
- Flexible Use of Funds: Typically, there are no restrictions on how you use the Loan proceeds, allowing you to achieve different goals.
Lastly, Lease Rental Discounting, Mortgage Loans, and Loan Against Fixed Deposits (FDs) are all suitable ways to access your funds.
Using LRD in Your Financial Strategy
For property owners balancing business growth and financial liquidity, Lease Rental Discounting might be an attractive option to explore. It allows you to monetise future rental income today without disturbing your asset base.
Suppose you have leased commercial office space with a solid tenant contract in place and anticipate rental income for the coming years. Opting for LRD could convert this future income to immediate cash flow that you could use for business or personal priorities.
Depending on your circumstances, you can choose an LRD, a Mortgage Loan, or a Loan Against Fixed Deposit.
Read More: Mortgage Scams Are Rampant – Few Tips To Avoid Them
Final Thoughts
Lease Rental Discounting is an easy method to unlock capital from your leased properties, particularly with an economy that is growing and real estate markets that are developing. However, careful consideration is necessary of lease terms, tenants being the biggest consideration, and your own financial obligations.
If you put your borrowing together right and receive professional assistance, the process can feel smooth. Furthermore, the results should be consistently matched against your longer-term aspirations. This would be applicable if you have leased and wish to access funds while still being the registered owner of the property. Hence, Lease Rental Discounting can be suitable for you.
Pranab Bhandari is an Editor of the Financial Blog “Financebuzz”. Apart from writing informative financial articles for his blog, he is a regular contributor to many national and international publications namely Tweak Your Biz, Growth Rocks ETC.
