The Ultimate Guide To Understanding Leasing as an Investment Option

Diversifying your investment portfolio helps you keep your risk balanced. It is similar to the age-old advice on not keeping all your eggs in one basket. However, with stock markets remaining volatile and traditional fixed deposits offering meager returns on investment, savvy investors are increasingly looking for smarter ways to maximize their returns. 

Leasing is an alternate investment vehicle that has gained immense traction of late. It offers a host of benefits, including higher yields than fixed deposits, capital appreciation in the long term, and tax deductions.

In this article, let’s look at what leasing is and its features that can help you build a profitable portfolio. We will also discuss its benefits and how you can invest in it.

What is Leasing?

Leasing involves the renting of movable or immovable assets for a specified period. It is an agreement between a lender, the lessor, and a borrower, the lessee. 

The owner of the asset, typically an individual or a company, leases it to the borrower for a specific period and at a certain cost. The lessee is provided with exclusive use of the asset in exchange for periodic payments throughout the agreed-upon lease term. 

Asset Leasing As An Alternative Investment Option

As an alternative investment option, asset leasing is a popular choice for investors looking to diversify their portfolios.

Features of Asset Leasing 

• Offers potentially higher returns than fixed deposits and other traditional investments
• Lower investment risk than equity and other alternative investments
• Provides investors with access to non-market linked investments that may not be available through conventional means
• Investors can benefit from higher yields due to reduced risks and increased liquidity
• Asset leasing offers flexibility as the investment can be tailored to suit individual investor needs
• Investors can defer taxes until they receive payments from the leased asset
• It involves lower upfront costs and greater return on investment over time

Benefits of Asset Leasing

Asset leasing can be an attractive investment approach for those seeking to generate passive income and diversify their portfolios. With asset leasing, investors have the opportunity to earn a fixed income while minimizing risk and capital outlay.

Leasing offers investments backed by real assets, such as equipment or property. It provides a secure form of collateral which is often more reliable than other forms of investing. In addition, the investor can avoid tying up large amounts of capital since most leases are based on the asset's value rather than its full purchase price.

1. Fixed Income: Investors can be assured of receiving reliable payments over the life of the lease. The payments are fixed and generally not subject to market fluctuations.
2. Passive Income Generation: Asset leasing provides investors with a steady passive income. A continuous stream of passive income frees them from the burden of actively managing their investments.
3. Easy Diversification: Asset leasing enables investors to diversify their portfolios with minimal investment while reducing their overall risk. It also allows further diversification as you can spread the investments across different asset classes and industries.
4. Short-Term Investment: Invested amount is locked in for a shorter term compared to traditional instruments or market-linked volatile vehicles.
5. Asset-Backed Investment: Asset leasing provides investors with a secure and reliable source of income, as it involves the agreement between two parties to lease an asset. The leased asset is often used as collateral to obtain a loan from a financial institution which helps generate returns from the investment.

How Does Asset Leasing Work?

Asset leasing works by having the investor contribute funds to a Specific Purpose Vehicle (SPV) in the form of a Limited Liability Partnership. The investors become partners in this LLP, and their ownership stake represents the amount they have invested.

The SPV then purchases an asset, such as real estate or equipment, for use by the company it is investing in. This investment is leased back to the company at a predetermined rate of return. The lease payments from that asset are used to pay off any debt associated with purchasing it, as well as providing returns for all Partners in the vehicle.

At maturity, when all liabilities associated with purchasing and maintaining the asset have been paid off, proceeds from any remaining cash flows are distributed to the Partners in proportion to their ownership stake.

Grip helps you easily invest in alternative investment modes like asset leasing. The cost associated with managing the asset leasing SPV is already covered in the Grip fee. We provide oversight, reporting, and management of all SPVs throughout the duration of the investment. It includes regular updates and performance reviews so that you can monitor your investments with confidence.

Why Do Companies Go For Leasing Rather Than Purchasing Assets?

Leasing assets is often seen as a more attractive option than purchasing them outright. It allows companies to acquire the necessary equipment without a large initial investment and can be tailored to fit their needs. The flexibility of asset leasing makes it an appealing choice for businesses of any size, from start-ups to well-established corporations.

Another advantage of leasing assets is that it reduces the risk of owning expensive items. Asset leasing is a great way to test out new equipment before committing to an outright purchase. If the leased asset does not meet expectations, companies can return them without incurring any major losses. 

Finally, by opting for asset leasing over purchasing, businesses can reduce their tax liabilities and benefit from certain government incentives. Asset leasing can also help companies save time and effort when it comes to maintenance and repair costs since these services are typically included in the leasing agreement.

All in all, asset leasing offers companies a cost-efficient and convenient way to access the latest technology, tools, and equipment needed to stay competitive in today’s market. By taking advantage of this option, businesses can enjoy significant savings while still ensuring they have access to the best possible resources. Asset leasing is a great choice for any organisation looking to maximise its operational efficiency without breaking the bank.

Investing In Leasing Via Grip

Lease investing allows investors to invest in an asset without actually buying it. Grip makes the process of leasing easier and more efficient by utilising its innovative technology platform.

It uses technology to automate many aspects of the lease investing process, including document creation, applicant screening, asset selection, and investment management. It simplifies the entire experience from start to finish, allowing investors to focus on finding the best deals without getting bogged down in paperwork or tedious tasks. 

How Does Leasing Perform Compared to Other Investment Options?

Lease investing is a great way to generate returns from real estate without having to own the underlying asset. Leasing offers investors the potential for higher yields than other low-risk investment options, with some properties providing annualised returns of up to 12%. 

Additionally, lease investments are liquid and easy to manage, making them an attractive option for those who want to diversify their portfolios quickly. Compared to high-risk investment vehicles such as stocks and commodities, leasing offers investors the potential to generate returns with less volatility.

Frequently Asked Questions

• What is IRR?

IRR (Internal Rate of Return) is a measure of financial performance that calculates the rate of return on an investment or project. IRR can be calculated as either a pre-tax or post-tax figure. Pre-tax IRR takes into account the cash flows before tax, whereas post-tax IRR looks at the returns after taxes have been paid.

1. What is Pre-Tax IRR?

Pre-tax IRR is a profitability measure used to evaluate investments and projects. It shows the rate of return investors expect from an investment over its lifetime, expressed as a percentage. The higher the pre-tax internal rate of return, the more attractive it becomes for investors due to its potential to generate profits in excess of initial capital investments.

1. What is Post-Tax IRR?

Post-tax IRR  is an important measure of profitability since it takes into account the impact of taxes on a project or investment. This rate reflects the return investors would receive after all tax liabilities have been paid out. Although post-tax IRR is often lower than pre-tax IRR, it paints a more accurate picture of the true return from an investment and should be considered in any evaluation process.