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How to generate Passive Income through Lease Investing

Created on 23 Mar 2022

Wraps up in 7 Min

Read by 8.6k people

Updated on 10 Sep 2022

Hello readers, do you know how Finology Blog educates you on concepts related to investing, mostly equity investing 😋? But today, we will tell you about a whole new investing avenue we have not covered before. 

But before that, some background about the industry in which this investing avenue depends. In India, this industry commercially and formally started in the early ‘70s. By the ’80s, it became so popular that even financial institutions started venturing into it, and this is the Leasing Industry. 

The avenue we will cover today is Lease Investing and how you can invest in lease contracts. Too many concepts, yes! So, we will try our best to tell you everything we know about Lease Investing and how you can invest in lease contracts. 

So, let’s get started, shall we? 

What is Lease Investing?

Before we move further, it's essential to understand what leasing is. It is nothing but a contractual agreement between two parties, namely the lessee (user) & lessor (owner), for regular payments to use an asset such as a building, vehicle, or any equipment for a specified period. These lessee & lessor can be anyone such as an individual or a company. 

So, the leasing contracts can take place between

  • Individual to Individual

  • Individual to Company

  • Company to Company.

That means not only individuals but big companies also play the leasing game. Let’s understand why companies choose to lease. 

So there is a company called Furlenco, an Indian online furniture rental platform. Basically, Furlenco gives furniture to people on a rental basis. And to be able to rent furniture, they have to buy it first, and for that, they have two standard options: either Furlenco can raise funds through VC or take a bank loan to buy the furniture.

These options are generally not the ideal choices because banks usually do not give loans to buy physical assets like furniture without collateral, and the funds raised through VC should ideally be used for growing the business and not buying assets from it. 

So, leasing physical assets is a great alternative for companies like Furlenco that require loads of assets to operate their business and yet want to remain asset-light. And guess what, that’s precisely what these companies are doing. 

But why do companies nowadays choose to lease over buy? It's very simple because leasing helps these companies be more asset-light. Also, the capital expenditure they make on buying these assets can now be utilised for operational purposes, i.e. converting CAPEX to OPEX.

Leasing also allows them to hyper-scale, i.e. leasing help these companies cater to an ever-growing customer base.  Plus, the funds they may raise from VC or PE can be used for growing the company. In a way, leasing saves a lot of money for companies. 

This growth in leasing space has resulted in a new investment avenue for retail investors, which is Lease Investing. Lease investing is the process of investing in the lease contracts of these companies. In a way, retail investors like you can benefit by co-investing in leased assets to companies and generating a source of passive income for yourself. 

How? We will find out soon but before that, take a look at why you should consider lease investing. 

Why should you consider lease investing?

So, as an investor, you can invest your time and money in lease investing because it is:

1. An opportunity to earn a fixed income 

Do you know what is amazing? A return of up to 22% Pre-Tax IRR and lease investing allows you to earn it. In lease contracts, you are entitled to earn a fixed income every month. 

2. A great source of passive income 

In lease investing, you generate a monthly income which is a great source of passive income. FYI, whenever you analyse fixed monthly income, you should calculate its return on an IRR (Internal Rate of Return) basis.

3. Contracts under Lease Financing are backed by strong collateral. 

First, you have to understand what collateral is; collateral is an asset such as a house or a car that acts as protection for the lender. If the borrower defaults on the repayment, then the lender can seize the collateral and recover his due amount. In lease financing contracts, the assets you invest in are backed by strong collateral. 

Asset-heavy businesses such as Airlines, Heavy equipment companies, manufacturing giants, and more lease their assets rather than buy them. 

You must know how volatile the stock markets are. Just take a look at Nifty50. In 2020 when the Covid crisis approached, the index fell to 8,000 from around 12,000, and now, in just two years, it’s trading in the range of roughly 16,000. Do you see how volatile that is? It is less volatile than the Stock Market.

In lease investing, you are exposed to a simpler, stable system as your returns are not dependent on market forces. 

Portfolio Diversification

Lease investing is a form of alternate investment. An alternate investment is a great tool to diversify your portfolio to mitigate risk better.  Everything is nice and shiny, right? But yes, watch out for the aspects that we are going to discuss below. 

Things to watch out for before Lease Investing

Everything is not bright and shiny all the time. Before investing, there are various things you should look out for. So, always do your due diligence. Here are some points you should take into consideration before entering a lease investing contract.  

The residual value of assets

Residual value is the estimated value of a fixed asset at the end of its useful life or lease term. It is advised to value the asset based on the residual value.

Deal Tenure

Lease contracts are tenure-based and may not have liquidity options for an early exit. Usually, the contracts last for years. Thus, it is really important to take a look at the tenure of the deal.  

Company Financials and background information

Even at the time of equity investments, a smart investor would always go through the background and financials of the company. In the same way, you should go through it while investing in the lease contract. That was all about its advantages & cautions. Moving forward, take a look at how can you invest in leasing contracts.

Way to generate Passive Income through Lease Investing.

Now is the time to answer the million-dollar question. How to generate a passive income through lease investing and how to invest in these contracts altogether. You can do this with the help of Grip.

It is an investment platform that offers curated investment opportunities in lease finance with a low minimum investment amount and fixed return. The grip helps you to enter into leasing contracts with an investment of as minimum as ₹10,000 (depending upon the contract). And it gives fixed, non-market-linked returns with monthly payouts.

Remember how companies lease their assets rather than buy them. In lease investing, retail investors can invest in lease contracts.

Remember our example of Furlenco. We told you that companies like Furlenco lease out assets. To ease out the leasing process, Grip comes in. For example, if Furlenco needs to buy furniture worth ₹10 crores, Grip gives them this much worth of furniture in return for fixed monthly returns. 

Let’s just say Grip gives furniture to Furlenco for 3 years. For those 3 years, Grip asks for rent of ₹6 crores, and at the same time, Grip has calculated that the residual value of the assets will be 70% at the end of the tenure. That means Furlenco only has to pay ₹6 crores for furniture worth ₹10 crores. At the end of the 3-year tenure, Grip sells out the furniture that was leased to Furlenco (or Furlenco can buy it at a pre-agreed price). This is all about how lease investing works.

By solving the capital requirements for the companies, Grip has created a new investment opportunity for retail investors in India. 

On GripInvest.in Grip raises money for buying assets for companies and people get the opportunity to invest in these lease contracts, for as low as ₹10,000. Once the funds are raised, Grip creates a Special Purpose Vehicle (SPV) that buys assets and leases those assets to companies like Furlenco. And the fixed monthly income that is received every month in the SPV, is distributed among the investors in the same proportion of their investment. 

Thus, Grip manages the end-to-end journey for your investments, leasing, and returns. 
It's always essential to compare the returns of various avenues. So, below we have compared Grip lease financing returns to other popular investment options for an investment of ₹20,000.

 

IRR

Repayment

Total Payout Over Tenure

Grip Lease Financing

21%

Monthly

₹ 27,263

Fixed Deposit

5.4%

Monthly

₹ 23,180

A+ Grade Corporate Bonds

9.2%

Bi-Annually

₹ 25,400

NIFTY 50 Index 

13.3%

End-of-Life

₹ 29,122

*All the returns calculated are on a pre-tax basis and on the basis of 36 months. NIFTY50 returns are from June 18-June 21. 

(The minimum investment amount for investing in lease contracts for Grip is ₹10,000. The above investment amount of ₹20,000 is taken to make you understand the concept.)

Now, to summarise, this is how  Lease investing through Grip works. The process goes like this.

  • First of all, the leasing partners are onboarded, and the investment opportunity is listed on the platform. 

  • Next, the contribution from various investors (such as you) is collected.

  • Then Grip purchases assets from the collection of contributions done by investors and leases these assets to partners. 

  • Finally, a timely return to investors is paid out. 

Lease Investing has become super simple now. 😊😊

The Bottom Line

We live in an era where investing has become easy and feasible. Alternative investments such as Lease Investing were thought of as an avenue for the rich. But today, even an initial investment of ₹10,000 can do the needful. 

What do you think about this new avenue you learned today? Tell us in the comment section below.

Until then, Happy Investing! :)

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Ayushi Upadhyay

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A Keen Learner. Tiny, brainy, and studious, this quiet one stays in her zone until she pops. And once she does, boy, are her comebacks snappy! There is no financial question that she can't answer through her magical blog-writing. 

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