In this episode she shares the highs and lows of lending, a.k.a. ‘being the bank’. While some investors seemingly hit the motherlode, it can come at a price you may be unwilling to pay. For those who grab the opportunity to be the bank, Kulkarni has all the details you’ll need to know. As a topic many people aren’t familiar with, she gives an overview of its pros and cons and delves into them, along with some real-life stories, to share her wealth of knowledge. If you thought Kulkarni was simply born a master of due diligence, heed her warning: Don’t try this at home, kids!

Timestamps:
00:42 | Being the Bank
06:25 | The Trade Off
08:46 | Don’t Try This at Home
13:38 | Tenants and Toilets
15:59 | Asking the Big Questions
17:16 | No Aptitude Tests Required
21:06 | Risky Business
23:38 | Cutting Through the Jargon
28:37 | Lock It In, Lender

Resources and Links:

[00:07:10] He was doing lending deals on businesses, he was doing lending deals against properties, doing all sorts of things. And I saw him probably a couple of years after he'd set up his business. And I remember when I first met him, I thought, 'Oh, my God, you've hit the motherlode.' 

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. It’s time to break out your balance sheets as she guides us through the pros and cons of lending, but don’t get too comfortable— as you’ll find out, she comes prepared with a safety warning.

Tyrone Shum:   

In previous episodes, Kulkarni has shared her thoughts on just about every lending-related topic under the sun— except one. She puts her ‘being the bank’ hat back on, drawing from prior discussions about private lending to discuss the pros and cons of lending, including the difference between short term and long term lending criteria.

Salena Kulkarni:   

[00:00:42] I think the concept of lending as an asset class is generally not one that people are all that familiar with. We're used to equity investing, meaning we own the asset, and we're trying to build equity basically, or create growth so that the purchase price is lower than the value of the asset. 

 

[00:01:07] So lending as an asset class is kind of new territory for the mainstream investor. But as the world evolves and different opportunities open up, it's certainly becoming something on the fringes that more people are interested in, and getting their head around, which is holding debt as an asset on your balance sheet. Which is a bit of a jumble of words, but it's looking at lending as and being the bank, I call it being the bank, as a different way of participating in real estate.

Tyrone Shum:   

[00:01:44] I probably need to unpack a little bit about looking at the balance sheet and all that, for the people that might not understand that. That's sort of more the accounting terms, isn't it? How does that work in the sense if you're a property investor with a portfolio?

Salena Kulkarni:   

[00:01:58] Well, if you think about a balance sheet, a balance sheet is just a list of what are all your assets, and what are all your debts. And generally speaking, what a traditional property investor likes to see is a list of real estate addresses on their assets side, and maybe a related loan on the debt side. 

  

[00:02:20] But what we're talking about with lending deals is you become the bank. Meaning you become the lender, someone owes you money, and you just collect that income stream, either in the form of interest or capital and interest. 

 

[00:02:37] And so what some clever dudes out there have gone and done is created a market where as an investor, you get to participate as the bank. We've talked about this a little in the past, but being the bank gives you the highest level of control with the lowest level of effort. And if you think about, say, for example, the big four banks, the sort of involvement that they have when you go out and purchase an investment property— they don't care if the place needs reno[vat]ing, they don't care if the tap falls off, they don't care if you have tenant problems, it's just pay me no matter what, because I'm the bank. And if for any reason you have headaches which cause you to miss payments, they say, 'Well, thank you very much, I'll just take that asset.' 

 

[00:03:28] And so if done properly, the benefits and protection that you can get in lending deals, especially when you're in first position are significant. So, the pivot in thinking is really switching from thinking that you have to own the asset to make money to 'I don't really care if I own it, I'm happy for someone else to have their name on the deed. But I'm there if something goes wrong, and I'm going to take control.'

Tyrone Shum:   

[00:04:02] I love that. The reason why I say that is because I've been involved in numerous deals very much similar to what you're talking about, I can relate from personal experience. Because ultimately, when you lend your money out, you want to get your return back plus your interest. Because otherwise, one, it's opportunity costs, and two, it's also a headache if you don't get your money back. But when you control an asset like that, and you have very much just no interest in what the actual asset does except that it's going to make money, as long as the deal stacks up and makes money, then ultimately, all I want is just to get a return back on that. 

  

[00:04:40] And this is why you pointed out such a very important point. The actual structure and setting up the agreements between both parties is so crucial because that is your protection. That is where you will ensure that you get your money back, just like the bank. 

  

[00:04:55] They probably send out every time you do a borrowing of the bank to borrow, say, for example, a property, there's, like, [a] 200 [or] 300 page document. I mean, who has time to read through that except for the legal team? So that's why we flip it over to them, and we pay them a fee to do that. That's what they work hard for. But ultimately, they're there to ensure that they protect their money that they're gonna lend to you, whether it be half a million dollars, $3 million [or] $10 million, they want to make sure that they get the return back. And if they don't, what are the consequences? And how will they actually take legal action to be able to get that asset back down and sell it down to be able to recoup their return? 

  

[00:05:31] And that's the beauty of being that because it's a very passive type of strategy. Once it's done, it's a lot of heavy work, a lot of front load at the beginning to get this done. But once you're actually in that transaction, for them, it's like a 30 year loan. So it's just continuously receiving monthly repayments. But for us, obviously, with the short term loans that we're doing and lending out to potential developers, and so forth, it could be six months, 12 months, we want to make sure that that period of time where the development goes successful, we get our money back at the end. 

 

[00:06:02] And this is why I think it was good to raise this as a topic to talk about because there are pros, and there are cons between doing these. And as you can understand short term loans, yes, you can get funds back within a short period of time if it's successful. If it's not, then things can go pear shaped you've got to go through the litigation route, but also at the same time, what do you do after that? 

Salena Kulkarni:   

[00:06:25] These are all really interesting questions. And I'll tell you a quick story. I've known a few people. But there's one guy in particular that I've known for about 12 years. He ran a pizza place, he ran a video store, he ran a bunch of different small businesses and worked really hard work. He worked seven days a week, and amassed quite a reasonable capital balance, and decided to go out on his own and set up a lending business. 

  

[00:06:57] Now he was doing lending deals, lots of different permutations, he was buying invoices off builders— meaning he gave the builder the money and then the builder just repaid it when they got paid. He was doing lending deals on businesses, he was doing lending deals against properties, doing all sorts of things. 

[00:07:17] And I saw him probably a couple of years after he'd set up his business. And I remember when I first met him, I thought, 'Oh, my God, you've hit the motherlode.' This was a long time ago. 'You must be laughing all the way to the bank.' And he said, 'Selena, it's lucrative, but it has probably shaved five to 10 good years off my life.' 

 

[00:07:38] And he learnt through baptism of fire, really, to understand the mechanics of how lending deals work, and how to do good due diligence on deals, and were the deals underwritten properly, all those things. But I think he definitely said the shine around lending deals had come off for him. 

 

[00:08:02] And so I think it's really important to kind of pre-qualify everything that we're about to say, which is: Lending is not something you can just go out and start doing as an inexperienced investor. The people I invest with in the lending space have been doing it for decades, if not longer, and they're veterans, and they understand the ins and outs of how it works. 

  

[00:08:25] So I think the point you made before is yes, the first thing is, the concept of lending as an asset class is an incredibly creative space. Like, we're broadly talking about short term and long term, but there's so many permutations, even within each of those, in terms of how deals get structured. 

Don’t Try This at Home  

[00:08:46] So, I don't think we've got enough time in, you know, maybe five to 10 podcasts to go through all of those permutations. And even then, particularly in other cultures— not so much Australia, but in other cultures where the way to transact real estate is more variable and creative— the way that lending deals can come into play just blows your mind. Because we just go, 'Wow, we just can't do that over here.' But you can certainly do that in other countries. So I just wanted to kind of set that up as a bit of a pre-frame. It's a bit like a stunt— don't go out and do this at home without proper training. 

Tyrone Shum:   

[00:09:28] Don't try this at home, kids!

Salena Kulkarni:   

[00:09:29] Don't try this at home, kids! That's right. That's right. So if we were to talk about pros of what I think lending deals are about, I think if they're secured by real property, then there can be a perception of much lower risk. And that definitely does de-risk a deal for you. If you know that if things go pear shaped, that you've got real estate to swoop in and take, then that de-risks that massively. 

  

[00:09:59] I should mention there's a huge difference between being in first position— as all of the major lenders are— and being in second position, meaning the other person who's in first gets paid first, and then you get paid second. Having that security either in first or second position is really probably your biggest insurance policy, if you like. I don't know if you want to add anything to that, Tyrone?

Tyrone Shum:   

[00:10:26] I do. The good thing as well, too— and this is what we've been working very closely with developers to work as closely as we don't necessarily only just get ourselves registered on the mortgage as well, which is good, there's first and second mortgage on this— but we also do get personal security guarantee as well. 

  

[00:10:44] So they call it a PPSR. And that means that we would get them to sign a deed to say if anything happens, we will go after all your personal assets as well, too. Which is also another way to de-risk it. And I love that component because initially, I thought most of the guarantees are irrelevant nowadays, even the banks don't even look at it as being much at all. Because I remember when I grew up, they said, 'Go to your mum and dad and ask them for a personal guarantee, you'll be able to borrow this against them so that way you can get a loan or whatnot.' 

 

[00:11:15] Nowadays, I don't think it's been as effective. But when it comes that these kind of things, especially with knowing what kind of assets that they have— because we ask for a list of assets from the people that borrow from us— you realise, wow, they've got a substantial amount of assets to go against that's under their name, particularly their personal place of residence, which could be the home that they're currently living in.

  

[00:11:37] And if they sign that away, they're definitely not going to ensure that they risked that to lose everything. So that gives us another certainty that they are committed to ensuring that the loan is paid off, because no one wants to lose their family home. Which is sad, because we don't want them to do that. But if that does happen, that's something else as a way to de-risk. 

  

[00:11:58] So, those are the key components I personally look for to insure for any deal. But we also do just check through their assets. The interesting thing is, we don't only just ask for one asset, because if there's not enough in one asset, we go for the other second asset. So usually they've got an investment properties as well. And we also register mortgage against those as well. That's the other things I look out for, in all the deals that we do.

Salena Kulkarni:   

[00:12:23] That's all fantastic and should be definitely part of the due diligence process. The term that I've heard used extensively to describe the sort of lending that you do is known as 'hard money lending.' So it's where people come in, they're happy to come in as a lender with a client that for some reason doesn't fit the bank criteria, but they're a good bet. And in order for them to get lending, they have to pay a premium rate with pretty rigid terms is kind of the way to describe it. 

  

[00:13:03] I think the other pros of this kind of deal is there's less moving parts. It's a really good way to learn about property, if you're going into a new market. If you're working with someone who knows what they're doing, they're fairly simple to execute. From your perspective, as an investor, the time leverage is phenomenal. So you don't have to find the deal. You don't have to work the deal, you do not have to collect payments, you just get paid. 

  

[00:13:38] And even with hard money lending, there's lots of different permutations. So I know in the States, for example, any hard money deals that I've been involved in, I might get paid monthly. I know the ones that you do, you get paid at the end, and we have a different market. But for the time that I put into the deal versus what I get, the difference is phenomenal. 

  

[00:13:59] I mean, it is one of the most passive strategies that you can be involved in. You don't have to worry about tenants and toilets, as you've heard me say before. And what I also really like about that kind of short term lending is they're less susceptible to volatility in the market. Because you're investing and you're in and out over a shorter period. So I see those as the high level pros. Did you want to add anything to that?

Tyrone Shum:   

[00:14:30] I think you've covered most of them actually, on that side of things for the pros of these type of lendings. And once again, the thing is that if you don't have to go and find the deals and the deals all stack up with the right diligence backing behind it, it is a very, very lucrative type of strategy. Because it's really like a... you can say an armchair type of approach where it's just passive. You put your money in, and at the end of term or during every month, depending on which permutation you go down, you pretty much just get the return. 

  

[00:14:59] And it sounds very sexy and all but with anything that sounds too good to be true, there's also risks and potential cons that you've got to consider as well. I think that probably leads really well into our next part, which is talking about the opposite side, what could potentially happen if things don't go well.

Salena Kulkarni:   

[00:15:17] Absolutely, and some of those pros, I just want to add as well, probably relate to their similar pros for long term or short term lending deals. It's all the same stuff. On the risks side in terms of risks and management, everything— and I mean, everything— hinges on the quality of the deal maker and their experience. 

Coming up after the break, Kulkarni shares her top questions to ask when completing your due diligence…

[00:16:13] So the risk from an investor perspective is: do you actually know what questions to ask to ensure that you are getting someone who's experienced and has the right qualifications? 

What you, as a second position lender, need to feel most comfortable about…

[00:21:06] If I think about other risks to consider, I think there's things like you need to understand if you don't have the first line of control. 

She lets us in on a secret from her investment past.

[00:25:07] Can I be frank and say that I've done that, in my deep dark past. I let the greed of a deal overshadow, and I asked my lawyer and principal, 'Does this sound right?'

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

Tyrone Shum:
Kulkarni scrutinises every deal before signing on the dotted line, asking as many questions as she needs to get her answers— a practice she says should be used for any strategy, but especially in the alternative space.

Salena Kulkarni:   

[00:15:59] I look at it from the viewpoint of I might be in relationship with this person for the rest of my life, if they're any good. I'm really all about, 'What is their experience? And what is the quality of the deals that they do? What's their track record?' 

  

[00:16:13] So the risk from an investor perspective is: do you actually know what questions to ask to ensure that you are getting someone who's experienced and has the right qualifications? Did you want to add anything to that?

Tyrone Shum:   

[00:16:31] 100% on that one, I totally agree. And that's the reason why it's so important with any deal maker that you work with, that when you check through the due diligence that they supply, everything that they've done in terms of checking through the developer or the borrower that they're working with— you've got to make sure that they've actually done a credit check on them, they've checked the CV, what their past track record is. 

  

[00:16:52] All those things come into play, because if for whatever reason, you discover that they've been bankrupt or defaulted on something like this, and they've got a track record of not delivering things back on time— these things will come and bite down the track. Because usually history repeats itself. Not saying every time it does, but these things are the components that you want to check out for any particular person. 

No Aptitude Tests Required  

[00:17:16] Not necessarily you want to do a psychometric test on them, and all that kind of stuff. But you do want to actually just get some kind of track record to see. And typically for us, we don't usually work with anyone who's first deal that they've done, or the second deal, we want to be able to ensure that they've been in the development industry or that particular property sector, for at least a minimum five years. They've got a good proven track record of a few deals, minimum is five deals that they've done that have been successful. And they've also shown a return, that they can actually return the funds back to the investors if they borrowed funds from them. 

  

[00:17:50] And you will start to see those things when you actually do due diligence. We get all their bank records, we get all the assets, liabilities, we get their accountant to sign off on all these things. And that's only one component. But there's so many other things that we do as part of our due diligence process. And it's so, so important to ensure those things are covered off, because ultimately, that's what it comes down to— trust. Besides looking at these documents, you want to trust that they can actually do their job correctly, and pay the loan back.

Salena Kulkarni:   

[00:18:18] I think that's all exactly right. I think the only thing I would add to that is that I think it's really a useful distinction that people understand the difference between a deal maker and a deal sponsor. So everything that you've just talked about there is really exactly right. The deal sponsor is the person who owns the deal that brings it to the table. The deal maker from my perspective— and maybe it's just semantics— but it's the person putting the deal together. 

  

[00:18:47] So say, for example, like in my world, I have lots of people who can bring opportunities to me, and I think of them as the deal maker. And the people that bring the deals to them, they're the deal sponsors. So there's kind of two layers of due diligence. But where I put most of my energy is on the deal maker. If I know the deal maker, and I know how they work, and they can describe to me exactly what you have, which is here's all the due diligence I do on the deal sponsor— that is awesome. 

  

[00:19:21] But the other side is me doing due diligence on them as a deal maker, because are they ethically sound? All those things that I just mentioned before. And so there's two components and two levels to the due diligence. So I think the experience and quality is both about the deal sponsor, and the deal maker. 

Tyrone Shum:   

[00:19:44] I think that's absolutely right. And ultimately, it comes down to building that relationship. Because if you're going to go into this type of lending type of arrangement, you're not going to be going in there, fly in, fly out overnight, kind of thing. It's a long term investment. And it takes a lot of time to establish one these relationships with, say, for example, these deal sponsors, but also it takes a great deal of time to establish the relationship between the deal maker. 

  

[00:20:11] And you won't know that within the first meeting or so, won't know that in the first week. It actually takes a bit of time, you've got to probably do a small deal with them just to  get a feel of what the process is like. And that's typical for what we do. And usually after about six to 12 months, when you're comfortable with the first deal that's gone through and you've got a return back on your investment, that's when you go, 'Okay, yep, I've established a strong relationship with them.' And you've done your due diligence as well at that point in time. And then you go, 'Okay, I think I could work with this person, particular long term,' or whatever it is. 

 

[00:20:40] So it's key to know that this is not a short term process or not something that will happen quickly, it will take a bit of time. And just like anything that you do in property, it's all about relationships. You build that relationship over time, and you build that trust as well, too. And out of that you can either have a fruition of a deal, or things just go south, unfortunately. But let's just hope the first is usually the path that you take.

Salena Kulkarni:   

[00:21:06] If I think about other risks to consider, I think there's things like you need to understand if you don't have the first line of control. So as I mentioned earlier, if you are in a second position, as a lender, you want to be really, really comfortable with two things. 

  

[00:21:24] Number one: what the overall leverage on a deal looks like. And obviously, if you're in second position, you'd be really striving for a super low loan to value ratio. If you're with someone who's borrowing up to the hilt, there's huge risks in that. And if something goes wrong, then there is a chance that, say, for example, in a fire sale, you don't get paid. So if you are not in first position, and even if you're in first position, I think it's really important to remind yourself that if you don't have enough of an equity cushion, you could get into some hot water.

Tyrone Shum:   

[00:22:04] And that's the thing, you want to make sure that when you are reviewing these type of deals, that there is going to be enough, one, equity, if something does go south at the end of the day, that it's going to be able to cover all the litigation costs, because that's a key component. That alone can erode the whole profit in the deal. Because legal fees are not cheap. If you have to go to even to the highest, which is the Supreme Court, you need to allow for at least a minimum of $100,000 to $250,000, just for those kind of legal fees, and that's the start. 

  

[00:22:34] So we always make sure when we look at these type of deals, that there is enough for that kind of buffer. Not only that, you just want to also be assured that if you do have to go to a fire sale, what is the actual bare minimum the market will be able to accept. Because you're not going to be able to ask for the top price when you actually have to sell the property quickly. You want to actually look at what's the realistic, maybe say knock off an extra 5% off the valuation, and calculate based on that to say, 'Okay, this is what's going to happen.' 

  

[00:23:00] Because ultimately, if it's a first tier bank— one, they don't want to get into this, because it's a PR nightmare for them, but two, if they do have to go and sell, they want to actually put it to the market as quick as possible and recoup their funds as quickly as possible as well. 

 

[00:23:13] And usually, that is a pretty lengthy process, it takes a while. But being in second position, this is where we work very closely with the first tier lender to have these terms in place. And we have what we call deed priority usually, to ensure that they cover off on all those aspects. Because if things do go south, we want to be able to still have some form of say or control as a second mortgage as well.

Salena Kulkarni:   

[00:23:38] Really, really great detail there. Proper documentation, I think, is the back end of all of that. And I think the challenge for someone who's fairly new to this is that they're going to struggle to understand what's in the documentation if they're not careful. In Australia, particularly, we're famous for using legal language and jargon to make things super confusing. Which I hate. And people go cross eyed and have to reread things 10 times to understand them. 

 

[00:24:10] But if you're concerned about the fact that you're about to sign on the dotted line, and you don't fully understand it— it's probably no different to when you sign a mortgage document when you go and get a loan for a mortgage. The banks like to obviously cover their butts. And so they have just pages and pages and pages of disclosures. And, banks have to, from a legal point of view, tell you to go and get legal advice to make sure you understand what you're signing. 

  

[00:24:39] So when it comes to lending deals as an investment class, I would say why would you do otherwise? Like making sure that you get someone who is confident about that stuff to just look over it, and make sure there's no red flags. And one of the things I see often is people blindly sign agreements and contracts, because they've got dollar signs in their eyes. Can I be frank and say that I've done that, in my deep dark past. I let the greed of a deal overshadow, and I asked my lawyer and principal, 'Does this sound right?' But I didn't dot my I's and I didn't cross my T's. And it cost me hundreds of thousands of dollars. So that one around make sure you understand proper documentation is huge.

Tyrone Shum:   

[00:25:36] I totally agree with Selena on that one, too, as well. Just make sure that you do have someone who's available that you can actually talk to that you can trust, that is a legal representative as well, too. Because it's important. We have a legal team that we work with that we trust, and so forth. And thank God for them, because they're the ones who have done such a great job to be able to put these legal documentations together on behalf— because obviously, we're pro for our investors, so we're going to make sure the documentation is protect us, not the borrower. 

 

[00:26:02] But ultimately, at the end of the day, you've got to make sure that you have a second pair of eyes from another legal representation to come back and say, 'Look, is this something that you're sounding comfortable with?' As long as you understand the legalities behind it, and you understand what you're going into, then that should give you a rest assurance that that works. 

  

[00:26:20] But yeah, I think that's really powerful to be able to talk about these. And one thing I wanted to also delve into talking about is we had a touch point about yield drag. Which is basically if we invest into these kind of short term deals, typically, the ones that I've been working with are usually between six to 12 months, typically about six month mark— what happens after that? Once you've come out of the deal, will you be able to jump into another deal straight away? 

  

[00:26:45] And sometimes that doesn't always happen all time, exactly that you like. And I think that's one thing that it'd be good to talk from your perspective, Salena, that once you finish a deal after say, six months, what happens after that. And when you look at the overall perspective, if you're looking for residual income or passive income coming in on a regular basis, like 12 months, 24 months— what are some of the cons about doing that?

Salena Kulkarni:   

[00:27:11] I think one of the things I'd say as a pre qualifier— because obviously my experience is more global— is one of the things I find fascinating in the US market especially. If you go to a bank to get a loan, I could, for example, get a loan now, at say, 3% interest rate, and— get this part— fixed. For 30 years. Right? Fixed for 30 years. 

 

[00:27:36] So when we talk about lending as an investment class, the first thing that I would say is that the shorter the loan, obviously, the more premium the rate of interest that you could earn. And there's obvious reasons for that. Number one, you're potentially involved in a transaction that carries more risk, there's going to be turnover of capital and new drag, as we've talked about. 

 

[00:28:03] But I think if you contrast that to a long term lending deal where, let's say you— and this happens all the time— you find someone who's a round peg in a square hole with the bank, for whatever reason, and that doesn't mean they're risky. They just don't fit the bank's criteria. And there's lots of business owners, especially, that fall into that category. And so on paper, they actually might be an okay bet, but they just don't fit the bank criteria. 

  

[00:28:37] So you might come in as a lender, and offer them a 10 [or] 20 [or] 30 year mortgage on their home as a lender. And that's when you really well and truly are being the bank. But you might have to accept, let's say that the market rate's 3% or 2%, whatever. You might say, 'Well, look, I'll take six to 8%, locked in, fixed for 30 years.' And so what's awesome about that is if you're looking to build annuities, there almost is no better leveraged position than being the bank on a 30 year loan. And you just have that income locked in for the rest of time, basically.

 

[00:29:22] Now, the risks on that sort of long term lending is, could they— when they get on their feet, or strengthen their position— go to the bank and refinance you out? Yeah, totally. But that may or may not happen. If it does, it might be five to 10 years down the track, in which case you've collected a fair bit of that. So that still bears the risk in terms of yield drag, but it's much lower. 

  

[00:29:48] On a short term lending deal, where, let's say, for example, it's 12 to 18 months, you might have a premium income. And when that deal is over, you get your capital back. And the next challenge is, 'Where am I going to park it next?' And if you're not careful, if your money sits around... let's compare a simple example. 

  

[00:30:11] But let's say you're getting 12% on that short term loan versus the six to 8% on the long term one. What can happen if your money sits around for too long, is when you start to annualise that year after year, it could be that the much lower rate of return is, in fact, on average, higher. Just because you haven't got that yield drag. 

  

[00:30:34] So the important thing to distinguish in my mind that the key point between a short term lending deal, and a long term lending deal, is the longer term lending deal lends itself to that concept of annuity. Which is an income stream that just keeps on going. Versus a short term lending deal, it's like a one off transaction. So yes, they can be lucrative. But you don't want to necessarily be the investor who only does short term lending deals. Really, if this is an area of interest that you want to expand into— then you want to be averaging that out so that you minimise that yield drag.

Tyrone Shum:   

[00313:20] I totally agree with you on that side. And it's just so important to keep that in mind. Because ultimately, at the end of the day, you've got to determine how much work do you want to put in to actually move your funds from one deal to another, if it's every six months or every 12 months? Or do you want something that you can just kind of set and forget for a while?

 

[00:31:40] And that's similar to buying property, when you think about it. When you buy a property, you kind of set and forget, hopefully, that your property manager manages that over a period of time for you. And with property, once you're locked in, it's usually a 20 [to] 30 year loan, so you don't really want to be buying and selling them every six months or 12 months.

Salena Kulkarni:   

[00:31:57] Yeah, it's exactly right. It's kind of like comparing flipping with a long term buy and hold. That's really what it's like.

Tyrone Shum:    

[00:32:03] Yeah, spot on. Well, Selena, that's been amazing. I think we've covered quite a lot of ground in this particular episode. Was there anything else you wanted to add about lending?

Salena Kulkarni:   

[00:32:13] I think the only other considerations I think that are worth thinking about is the main problem or limitation of lending is you're not really hedging against inflation. So if we were, God forbid, to move into a really high inflationary environment, then lending doesn't necessarily support that. And the reason is you negotiate to be paid at a certain rate on a certain amount for a certain period of time. So if inflation goes insane, there's nothing you can do about renegotiating those terms. So that's something to bear in mind. 

  

[00:32:54] And the other thing is you need to be a big girl and boy, and recognise that when you put yourself into these deals, you're locked in. You can't suddenly go, 'Oh, actually, I really need that money.' Because liquidity can vary massively. I think the advice I would give anyone is: If you're thinking about this, do your due diligence. Remind yourself that when you are a lender, you have the highest rate of return. You need to understand the paperwork and you need a team. You can't be the lone wolf in this model.

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