In this episode Kulkarni explains how the wealth building game is much like the seasons of the year, and how while you may experience showers, it produces well-flowering gardens by the end. Along with one of her classic case studies, she reveals why when you’re in the springtime of growing your investment garden, it’s important not to put all of your about-to-hatch eggs in one basket.

Timestamps:
00:36 | Diving Into the Alternative
02:48 | Look Before You Leap
04:53 | The Changing Seasons
06:15 | There’s No Passive In Property
10:21 | Bill’s Options
12:29 | Australia’s Property Market Dilemma
15:08 | All In, or In The Middle?
20:02 | Don’t Throw It All On Red

Resources and Links:

[00:03:13] And I can testify from personal experience that where I've tried to maybe leapfrog or jump into something that was just too big for me, I've lost my shirt. So I think the context around wealth building for most people is it should be considered and done mindfully. And with a sense of patience. And for me, that has been the hardest trait to encourage in myself over the last 20 years is just patience. 

This is Property Investory where we talk to successful property investors to find out more about their stories, mindset and strategies.

 

I’m Tyrone Shum and in this episode we’re speaking with Amazon bestselling author, chartered accountant, and founder of the Freedom Warrior program, Salena Kulkarni. She delves into the importance of timing when it comes to alternative strategies, and explains the ins and outs of a case study where her client not only got his investment cake, but was able to eat it too.

Tyrone Shum:   

Kulkarni lives and breathes alternative investments strategies, topics many people are curious about. One of the biggest questions regarding this is: Is there an ideal time to jump in?

Salena Kulkarni:   

[00:00:36] It's actually a really considered and a great question to be asking, because it's definitely true that alternative investments are not for everyone. And we've talked about this in the past, the three parts of the game when it comes to wealth building. There's two parts to it. One is a timing issue. And the other is, do alternative investments even align with what you're trying to achieve?

Tyrone Shum:   

[00:01:10] That's always the biggest challenge. Because how do you know when is the actual ideal time to jump in? And what stage? Is there some kind of fixed number, is it how many properties you've got in your portfolio? It's a hard question, because you get so many investors who are eager, who have built a substantial amount of portfolio properties in their portfolio— but at the same time, then there's other investors who maybe have only one or two just starting out, and might be interested in the fact that the alternative strategies can help them build wealth. Because the increase in capital seems really sexy and really, really, paints a picture. But realistically, what are the things that we need to consider that can help them make that determination or that decision to jump in?

Salena Kulkarni:   

[00:01:58] This is definitely a really important conversation. My own experience and perspective on this is that building wealth is a little bit like playing a very, very slow game of chess, rather than checkers. And checkers can be super fast, and you can jump pieces, and the game can be over in seconds flat. And I'm sure that's true of chess as well. But for most people it's a slow, measured game. 

[00:02:27] And I think one of the challenges that people face when they become investors is that you're always battling impatience. And I'm shocking at this. One of my greatest flaws, as my husband will testify, is that I'm one of the most impatient people when it just comes to just getting stuff done. 

[00:02:48] And what wealth building has taught me is it doesn't matter how much you hustle, or how many corners you tried to cut, or any of those things. Wealth building takes time. And if you're looking down the barrel of something that you think could be a get rich quick [scheme], then from my perspective, you're barking up the wrong tree. 

[00:03:13] And I can testify from personal experience that where I've tried to maybe leapfrog or jump into something that was just too big for me, I've lost my shirt. So I think the context around wealth building for most people, is it should be considered and done mindfully. And with a sense of patience. And for me, that has been the hardest trait to encourage in myself over the last 20 years is just patience. And the further along you get, the more exponential results in less time. 

[00:03:58] But when we're talking about the place of different asset classes and different types of investing, I think the first part is recognising where you are in your journey. So are you in part one of the game where basically— if you're starting from zero and you haven't had some huge inheritance that's just been handed to you— you've got to create surplus. And I call that spring. When you're in the spring of investing, it's all about, 'How do I take what I own and create surplus?' 

 

[00:04:33] And that's a tough time for young people especially, but even if you're someone who's older, who's maybe coming to the wealth game or the wealth building game late, you've got to create surplus. If you can't live within your means, if you can't build great stewardship, it's really hard to create surplus. 

[00:04:53] So if you're in part one of the game, the first part is spring and then you move into summer. Summer is all about, 'How do I get traction? How do I use leverage to build capital?' And as we've talked about before, the local Australian real estate market is the best playground for that. There are opportunities to put a little bit of money in to get a massive result over time. 

[00:05:19] So part one of the game is really that, and you can't bypass that. You can't go, 'Well, let me forget about that. And let me jump into sexier strategies that are better for cash flow.' Necessarily. I'll put the asterix [after] necessarily.

Tyrone Shum:   

[00:05:38] That's the challenge. I agree with you. When somebody says, 'We've got a fantastic deal here that's returning 20 to 30% return', and you go, 'Wow, that's phenomenal compared to, say, buying a property that's going to return you maybe about three to 4%, depending on the rental yield and after all the costs.' You got to yourself, 'Gosh, I can accelerate my journey much faster by just investing into these deals, in comparison to just buying an asset that one, you're going to have to put a lot of upfront costs initially, and two, it's going to take a while for it to grow, it can be anywhere up to 10 [or] 20 years, or whatever it is, depending on the capital growth of it.' 

There’s No Passive In Property 

[00:06:15] On top of that, there's all the headaches of having to manage the tenant with the property manager. And I know and you know from experience, nothing is always going to be passive with property. There's still going to be some form of involvement, you've got to make sure you check, you speak to the agent, etc, that kind of thing. So you go, 'Oh, gosh, it's so much headache just for that.' Compared to, say, 'Okay, let's just jump into getting into one of these deals that could return that percentage.' You don't have to worry about those headaches. What are your thoughts on that?

Salena Kulkarni:   

[00:06:43] That's interesting. Look, there's no question one of the things that people get really excited about with lending deals and with the alternative investing space is that the cash returns are staggering, compared to what we can earn from traditional property. But transitioning into alternative investments without a good capital base behind you, I think is potentially foolish. Unless you have this luxury of epic income. Like, if you're earning amazing money, and you just want to skip the capital building and just go straight for income replacement, I understand that thinking.

[00:07:21] I think my training has made me very conservative. And what I believe is that you want multiple safety nets behind you. And so for someone who's a less experienced investor— and it's not so much that alternative investments are a higher risk, necessarily, because some of the things I do are pretty low risk. It's just more about, like, does it make sense for you to be trying to build cash flow from the viewpoint... 

 

[00:07:56] Effectively, if you're taking income and putting it straight into alternative, you're saving your way into building passive income. Versus letting that capital asset do the heavy lifting for you. You're not really using leverage. 

[00:08:13] I don't want to tarnish everyone with the same brush. But if you're in the situation where you're new to investing, why not take a few years and build some capital? And then take a small percentage of that capital and allocate it to the sorts of deals that you and I are doing, where you can get strong double digit returns. I actually care deeply about the outcomes that people get. And the risk with taking money, if you have no capital behind you, and putting it all on red at the casino is sort of the risk we're talking about. Obviously what we do isn't going to the casino. But I'm just not a huge advocate of putting all your eggs in one basket.

Tyrone Shum:   

[00:08:58] It's good that you mentioned that analogy, because ultimately, at the end of the day, if you say, for example, invest your funds that are coming from equity, or the capital you've built up in your property portfolio, you can borrow that against the property. And if something does go wrong, as an example, you don't actually get that money back, you still have time to be able to pay that back off, because it's just funds that are sitting in the equity. And then over time, the capital that grows in that can essentially... not necessarily replace it, but at least you've still got capital growth in the assumption to perform. 

[00:09:33] But if you actually have that money, you haven't purchased any properties and you have any capital sitting behind you, you use those funds that you have saved up essentially, from your income and then invested that— you basically lose all that money. And that is, to me, quite a risky strategy, not saying that the deals are risky, but if something does happen, you don't have a backup plan. You've lost all your hard earned money and there's no backup there. 

  

[00:09:57] So I see where you're coming from with that side of things because at least if you've got a property and you're able to draw out capital equity from it, and invest that into these alternative strategies, if something does go wrong, at least you've still got an asset that's available that you can tap into eventually, again.

Coming up after the break, we dive into some real life case studies…

[00:10:21] This is a real person, but let's give them an imaginary name of Bill. So Bill comes along, and he's got half a million dollars, right? And he just wants to understand, 'What are my options? What could I do with that?'

We discuss Bill’s options and their respective pros and cons…

[00:17:57] So that is the boom mic drop there. That is why I— I know it's sexy to say let me do it in six or seven. But the beauty of option three is you get your cake and you get to eat it too.

She shares her advice for entering into any strategy.

[00:20:02] I think the thing that I always emphasise— and I love this idea of being a strategist first and foremost, before we even talk about which strategy— but I think the truth of the matter is there is no right or wrong. 

And that’s next. I’m Tyrone Shum and you’re listening to Property Investory.

Coming back, Kulkarni explains how she applies the idea of alternative investments and turns them into reality.

Salena Kulkarni:    

[00:10:21] This is a real person, but let's give them an imaginary name of Bill. So Bill comes along, and he's got half a million dollars, right? And he just wants to understand, 'What are my options? What could I do with that?' So the first option that he could consider is going all in on local property. Just property as we know it, simple buy and hold. And I've got the mental math roughly there, which is that he could go out and— assuming his closing costs were about, say, 4%— he could go out and buy just over $2.08 million worth of assets, assuming a 20% deposit and focusing closing costs. So he'd have equity of about $416,000 [or] $417,000 in equity from that portfolio. 

 

[00:11:19] Fast forward 10 years, let's assume he got 4% growth, or 5% growth or 6% growth, and we just want to do the analysis, that would give him an asset base of somewhere between, say, $1.29 million and $1.85 million in equity over that 10 year period. So not insignificant, and a pretty good outcome. 

 

[00:11:44] If we then go, 'Well, what cash flow would Bill be earning on that portfolio?' And let's be super optimistic. And I know everyone generally likes to throw around the gross number. But I like talking net, like, what do you got, after all expenses? And optimistically, and you and I've talked about this before, the average for Australia is one to two and a half percent. So let's assume 2%. His income off that portfolio, if he'd got 4% growth would be $25,000 [or] $26,000. If he'd had 6% growth, that would be as high as $37,000, at 2% in income stream. So that's the first option that he could have gone all in on local. 

Tyrone Shum:   

[00:12:29] One thing I want to mention— when you look at that, 10 years, great. The capital growth is tremendous. 1.9 for $400,000, but the income is absolutely poor. I'm gonna point that out. It's not glamorous at all, and you still can't get out of a job. Or if you're still working in a business or whatever it is, you're still stuck there because you're not gonna survive on $20,000 or $30,000 a year. And that's where the dilemma comes along.

Salena Kulkarni:   

[00:12:55] And here's the thing. What you're saying is exactly the dilemma I have about the Australian property market. By itself, it is awesome for building capital. It is absolutely crap for cash flow. But let me take you through this case study, because I think it will help you understand, when someone comes to me, what I'm trying to contrast for them. 

[00:13:16] But the next thing is like, let's assume they said to me, 'Well, Selena, what if we went all in on alternative? Half a million dollars.' So let's assume we split that into three buckets and then split those buckets into multiple deals. But let's say we took $125,000 and we said, 'Right, we're gonna chase a bunch of deals that earn us 10%. We're going to take the bulk of it, $250,000, and put it into deals that earn us 8%. And then we'll take another $125,000 and put it into deals that are 12.' So we're being fairly conservative, not wild. You and I know there are much better returns. 

 

[00:13:53] And when you add up the cash flow from that kind of split, maybe that gives you $47,5000, something like that. Like just by putting those three buckets together. If you fast forward that for 10 years. Now, if you just took that money off the table every year, that's $47,500 you took off the table each year or 10 years, you took $475,000. 

 

[00:14:15] But let's say for that 10 year block, you didn't need the money and you could reinvest it at the end of every year. At the end of 10 years, that would be throwing off an annuity of $122,000 per annum. So that's the second scenario, you're all in on alternative. And obviously that sounds incredibly sexy. 

[00:14:37] But what if you're someone who's super conservative? As I, someone like me. Let's talk about what I'm calling the hybrid or the blend, which to some degree gives you your cake and you can eat it too. But let's imagine for the first 10 years, you just say, 'I don't feel like I can stomach going all in on alternative straight away. I want to build that capital base behind me.' 

  

[00:15:08] So you go in on all local real estate. And let's assume we go middle of the road, we have 5% growth during that 10 year block. In 10 years' time, you end up in that scenario where you've got $1.565 million in equity. And at 2% cash flow, that's about $31,000. Okay, so that's, that's the scenario. So you've got $1.565 million in capital now, and $31,000 income. 

 

[00:15:37] Now let's look at three scenarios. In one scenario, you take 30% of that equity, or 40%, or 50%. I'm going to show you three scenarios. And you take a percentage of that capital and you put it into alternative. So that may involve refinancing, it may involve liquidating one asset, whatever that looks like. 

 

[00:15:58] But if you took, say, 30% of that capital and put it into alternative, all the way through— I like to contrast 30, 40, 50, and even 20. But in this case, we'll do 30, 40, 50. What happens to your total cash flow at 30%, it jumps from being $31,000 up to $66,000. If you had taken 40% of that portfolio and put it into alternative, it would jump from $31,000 up to $78,000. And if you had taken 50% of that portfolio and put it into alternative, your income jumps to $90,000. 

 

[00:16:36] Now if we're talking about the increase in cash flow simply by tweaking the portfolio at year 10— like so you haven't done anything prior to that— you've increased your cash flow somewhere between 212% and 287%. And that is the magic of what we're talking about here, is how do you have your cake and eat it too. 

 

[00:16:59] So if I give this to you in a summary, so that you understand it, the options are this. This is the options for Bill. Option one, let's say his goal— and this is where the alignment with strategy and goals matters, and I'm being very simplistic— but let's say his goal is he wants to get to $100,000 passive income. Option one, if he goes all in on property here in Australia, based on the numbers that we talked about, it would take him 25 plus years to hit $100,000.

[00:17:33] If we went all in on option two, he would hit $100,000 somewhere between six to seven years. And if he went with option three, which was let me blend Australian real estate we alternative, he would do it in 10 to 12 years. But actually he'd be doing it in two years, because he's really only introduced alternative in year 10. 

[00:17:57] So that is the boom mic drop there. That is why I— I know it's sexy to say let me do it in six or seven. But the beauty of option three is you get your cake and you get to eat it too.

Tyrone Shum:   

[00:18:12] I love that.

Salena Kulkarni:  

[00:18:13] That was very long winded, wasn't it? 

Tyrone Shum:   

[00:18:16] It was perfect. The reason why I resonate with that so much is because this is a real scenario of multiple investors that I work with. Because they come to me for these alternative strategies. And we invest it. The other day, I was just having a chat to one of them, who isn't called Bill, but is very similar to the scenario that he has quite a substantial portfolio. 

 

[00:18:37] And he said to me, 'Hey, Tyrone, when's the next big deal coming out?' I said, 'Oh, in the next couple weeks'. 'Well, wait for me, because I'm just going back to my broker who's going to help me refinance out, then I'll have $300,000 [to] $400,000.' I said, 'Oh, that's great.' And I should also let you know, he's reinvested $1 million with us as well. So he keeps reinvesting his equity in the capital that he's got originally from his portfolio run that sit there. Because I know that his portfolios generate quite a lot of cash flow as well. But he just says, 'Look, it's just much better to put them into alternative strategies.' And I'm pretty sure it's only a small proportion of his portfolio, because he's high net wealth.

[00:19:10] But what's fascinating is that if he continually generates between 15 to 20%— that's really conservative— he's going to generate easily $200,000 to $300,000 extra cash flow on top of his portfolio that's already throwing up cash from there. And that's a typical scenario of a investor that I currently work with pretty much on a regular basis. 

 

[00:19:32] So it's not uncommon, but I think it's also a question is, at what time in the journey do you do this? And he's obviously been in property for the last more than a decade. He's not young anymore. He's got teenage kids, but he's obviously done that strategy very much in a hybrid way. Knowing that that's what we've been talking about the third option of that strategy and it seems to be a very effective strategy hearing that out.

Salena Kulkarni:   

[00:20:02] I think the thing that I always emphasise— and I love this idea of being a strategist first and foremost, before we even talk about which strategy— but I think the truth of the matter is there is no right or wrong. And I've worked with investors and I'm going to be devil's advocate here, Tyrone, but I've worked with investors who are high net worth who do what that guy's doing, which is I'm all in on red, and then they lose it. 

 

[00:20:36] And it's not necessarily that they die in a ditch over it. But the emotional toll of having to tell your spouse or your family that you lost over a million dollars, it's not great. And so there's no right or wrong, as long as you're going into it eyes wide open. But I'm super careful about the people that I take under my wing because I want this to be like an experience where they're not placing it all on red, because that just doesn't align with me, and that they stay really safe. 

  

[00:21:15] And so I think it's really important that people, when they're looking at alternative, they're really understanding the implications if it doesn't go according to plan. And they understand the implications in terms of the context of their whole portfolio. How much are you putting at risk in this particular strategy? And then the opposite is true as well. Like if you went all in on traditional buy and hold, that wouldn't serve you either. It's about finding a balance.

Tyrone Shum:   

[00:21:47] That's right. So it's finding the right balance between the two, which is what we're talking about, which is this hybrid strategy. And I guess the question then really comes down to is asking yourself, what are the goals that you're trying to achieve? Because ultimately, these deals that are everywhere if you look hard enough. They do come in. But the question is how many of these deals would be enough to serve the purpose of reaching the goal that you want to achieve?

  

[00:22:12] Some people can get overboard and just keep going for the sake of that high, it's almost like as though it's winning lotto or something like that. But as you said, ultimately, you've got to look at it from a conservative point of view and approach that you want to preserve your money there.

Salena Kulkarni:   

[00:22:27] I think the thing I want to add, though, Tyrone, we've talked about lending deals in other podcasts. And this could be another topic for another time. But there's a big difference between short term lending and long term lending deals. And the downside, if you like, of having lucrative returns on a short term lending deal is you've got your turnover of capital and that capital churn.

  

[00:22:52] And what that means is, if you commit to a bunch of 12 month projects, that means every 12 months, when you get your money back, you've got to find another home for it. And so if you're not aligned with someone or a group that can just supply that to you endlessly, you will get yield to drag. And I'm not sure if we've spoken about that before. But that is the downside of short term lending deals as an investor.

Thank you to Salena Kulkarni, our guest on this special episode of Property Investory.