The onset of the pandemic and the resultant crash of money market rates have made many money markets investors seek an alternative safe-haven for their money. There is nothing wrong with reshuffling your investment portfolio if the returns fall below your benchmark projections. That becomes critical if a sizeable proportion of your income comes from the money market.
The money market plays a crucial role in your financial security (fixed income) portfolio. Apart from acting as a buffer if your other sources of income, it also creates cash flow, especially for those who don’t earn a salary. However, if the rates drop to a certain level, you may be forced to move your funds to avert a cash flow crisis.
You still need to hold unto some cash
Although rates are low in the money market, there are some fixed-income investments still yield 5% or above. This includes some Commercial Papers and bonds. The best time to buy a bond is during the initial issue where you get allocation at face value (N100 par value). For previously issued bonds, when rates go down, the bond price goes up. You may get a yield of more than 5% in the secondary market, but the sale price will be higher than N100 (per unit). That means you pay more than the face value of the bond, effectively depleting your capital. This can work if the bond (coupon) rate is such that you can build back the money you paid as premium (if you are disciplined).
It is not a wise move to move out all your investments away from fixed-income vehicles. Apart from the fact that you need to have cash reserves, money market rates rise and fall. It will not remain depressed forever. Also, moving money from a safe haven to a risky investment is not wise, unless you know what you are doing. You may regret it if things do not pan out as anticipated, hence effectively jumping from the frying pan to fire.
Investing in real estate
Real estate investment can be secure if you know what you are doing. You can start by asking for a loan by showing proof of income and the plan and strategy for the business you want to start. This involves acquiring the right knowledge and working with the right team. Like in most investments, there are two approaches to investing in real estate – build/buy to rent (cash flow) or build/buy to sell (capital appreciation).
BUILD TO RENT
This involves building for rental income. The property has to be in a location with good demand for rental property. You have to study how this works before you dive in. There are many factors to consider, from the type of building, finishing, property/facility management etc.
Your rate of return is not simply rent divided by the cost of the building. You have to factor in other costs like facility management fees, property tax, allowance for repairs, allowance for vacancies, insurance premiums, fees and commissions etc. Having a good property management company helps screen out bad tenants and keeps the property in good shape.
One main advantage of this model is the regular cash flow that can be adjusted for inflation every 2 years or so. Also, the land under the property appreciates if is in a good location. One key disadvantage of this model is that it kills the velocity of your money. Your capital is parked in the property unless you take a mortgage against the property to move into another investment. The challenge with mortgages in Nigeria is that the rental income may not cover your mortgage payments.
You don’t need to come up with all the money to build to rent. There are crowdfunding platforms that allow you in a property with as low as N50,000 or less and get your returns from the rental income. This is a good way to build up capital for bigger projects in the future..
BUILD TO SELL
This option is more exciting. You build in a good location and can influence the selling price based on the finishing. You stage the building, market properly, and close the sale. The risk is low if you know what you are doing.
Your money is not tied to one property. You can reinvest your profit in a bigger property. Since the turnaround period is short, you can access funding for the project. If you are building an estate, subscribers can fund the project by buying off-plan.
You don’t need to come up with all the money to build to sell. There are crowdfunding platforms that allow you to pool resources to build and share profits from the sale of the property. This is a good way to build up capital for going solo if that is your plan.
I have often heard arguments about which model is better – build to rent or build to sell. Both perform different functions which are important – cash flow and capital appreciation. You need both. What determines where you should start from depends on what you aim to achieve. If you keep building and selling and have nothing in your portfolio, you may squander your profits in frivolities which may come back to bite you in the future. It is not enough to make money, you need to be able to retain it and grow it some more.
Agric Investments
Technology (agritech) has brought agriculture a full circle as an attractive investment destination. With agric investment platforms, you don’t need to run a farm to be a farmer. You can own a farm managed by professionals, or invest in an existing farm. Entry is as low as N20,000 while returns range from 15% – 35% and above, in less than one year depending on the crop. The investments are insured, hence you are sure of the return of your money.
The beauty of this investment is the social impact. Local farmers are empowered with training, access to better technology, farm inputs, access to markets and more income. It is an all-round win. For refugees escaping the money market, it is an opportunity to get above 10% returns while doing good. You still need to do your due diligence – investigate before you invest.
Calculated risk
The two examples above are just some options available of relatively low-risk investments you can move into, to maintain your cash flow. There is slightly more risk, especially with real estate, but if you do your homework well, you will do just fine.
You need to keep your financial security and financial growth plans in place. A football coach asking his central defenders to join the attack because he is desperate to score may get away with it. It can also backfire spectacularly. The need for a balanced financial portfolio through asset allocation cannot be overemphasised, even in a pandemic. Fund managers also need to rejig their portfolios to bring aboard higher return investments that gives more attractive returns to their clients, hence stemming some of the capital flight from the money market.
One thing is clear, in the current environment (aka new normal), you need to become more comfortable with taking more risk, if you want to maintain the rate of return you are used to. You need to be flexible and keep an open mind. The world has changed, perhaps forever. You cannot afford to remain a relic of the past.
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