Lease rental discounting (LRD) is a financing option that allows property owners to raise funds by pledging the future rental income from their leased commercial properties as collateral. The loan amount is usually calculated as a percentage of the discounted value of expected rentals over the lease period.
LRD offers several unique advantages for property investors compared to traditional financing methods. This article will discuss the key lease rental discounting benefits that make it beneficial for landlords with tenant-occupied investment properties.
What are the Lease Rental Discounting Advantages for Property Investors?
Here are some of the Lease rental discounting benefits for individuals who are looking forward to investing in property:
1. Instant Access to Funds
LRD for property investors loans are most attractive because they provide quick access to funds. The approval process for LRD loans can be faster than traditional loans, as it is primarily based on the strength of the lease agreement, tenant profile, and property value, although the applicant’s creditworthiness is also considered.
Once approved, the agreed loan amount is credited to the applicant’s account typically within a few days. These funds can be deployed immediately for other investments or expenses instead of lying idle in the rental property.
2. No Need to Liquidate Existing Assets
Another LRD loan benefit is that it allows property investors to monetise their rental assets without having to sell them. Traditional loans often require liquidating other properties or investments to raise capital for new purchases or renovations. This limits portfolio growth and continuity of rental income.
However, LRD allows you to obtain cash based on rental income while keeping full ownership of the property. The property continues earning rents during the loan tenure, which helps make repayments comfortably. Investors can use LRD to expand their portfolio without selling their existing assets.
3. Customisable Loan Amounts
LRD loan amounts are based on a percentage of the property’s rental income stream spread over the lease period. Banks and non-banking financial companies assess the risk profile and accordingly sanction loans typically up to 65-80% of expected rents.
Customisable loan amounts allow for the drawing of only the required capital instead of over-leveraging. Smaller LRD loans are easier to service since the equated monthly instalments (EMIs) remain within sustainable limits. This ensures proper asset-liability management.
4. No Personal Credit Checks
Banks and NBFCs rely primarily on the property’s rental income potential for underwriting real estate financing through LRD loans. The credit profile of the applicant is not important, considering the collateralised nature of the offering.
First-time investors with limited credit histories can more easily obtain LRD loans. Self-employed applicants also benefit since their fluctuating incomes are ignored if the leases demonstrate adequate rent servicing ability. Minimum eligibility criteria make LRD accessible to more investors.
5. Access to Working Capital
LRD provides funds that can be used as working capital for other purposes. The loan amount sanctioned against expected rentals can be utilised for renovations to enhance property value, service existing debts with high interest costs or fund children’s education or marriage. It avoids raising costly credit card debt or personal loans for these goals.
6. Risk Management of Rental Default
LRD loans provide property owners with liquidity against future rental income, but they do not guarantee funds if tenants default or vacate unexpectedly. In such cases, the borrower remains responsible for repaying the loan EMI regardless of rental income interruptions. In case existing tenants default abruptly, the LRD loan ensures investors have ready capital to service liabilities until they can find replacement tenants. It offers financial support in case a property is vacant for several months between leases. The available funds help manage assets and liabilities effectively.
Conclusion
Lease rental discounting benefits include flexible financing that enables landlords to grow their portfolios carefully without putting pressure on their cash flow. It permits maintaining ownership of existing rent-yielding assets while drawing capital against them safely. LRD deserves consideration by all investor-landlords seeking optimal asset utilisation alongside diversification. The product’s versatility and ease of access deliver superior value. A customised LRD loan aligns well with smart leveraging tactics for wealth creation over multiple cycles.
Many NBFCs and financial institutions in India, including Shriram Finance, offer working capital and asset-backed loans based on future income streams, providing investors with additional options for managing liquidity.
