In this episode Kulkarni shares the basis of her conference regarding making tough decisions when it comes to your property portfolio in turbulent times. While not a doomsayer by any means, she takes a look at the world through a realist lens and takes into account what has happened in recent years. In doing so, she tackles how these events have impacted people’s finances as well as their property portfolios, and how they’ve merged to form a cocktail that nobody ordered.

Timestamps:
00:58 | Headwinds and Wealth Building in High Turbulance
03:39 | The Loudest Voices
05:25 | What Does the Tribe Need?
10:44 | Liquidity Tension
14:59 | Making the Hard Decisions Now
17:40 | From Black to Red
21:04 | Great Times, Turbulant Times, and the Government
24:18 | Letting Go

Resources and Links:

[00:01:45] The underlying premise of the whole weekend was: How do you do the work now, so that later on when you might feel emotional, and your judgement might be clouded, you've done as much as possible to position for the worst outcome if it happens?

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. In this episode she tackles the uncertainty in our markets and shares case studies that can offer insight into how, and when, it may be best to make the tough decisions when it comes to your portfolio.

Tyrone Shum:   

Kulkarni held a conference in June 2022 that centred around the climate at the time and how it could potentially have significant ramifications for property investors. Neither Kulkarni nor I are financial advisors, so please note this episode is not financial advice and you will need to speak to your financial planner for advice that is tailored for you. 

Salena Kulkarni:   

[00:00:58] The theme that we had over the weekend was headwinds and wealth building in high turbulence. And there's no question that there's a lot of big things happening in the world right now. And I think the ripple effects for those will definitely be significant. 

  

[00:01:15] And I think one of the jobs as an investor is: How do you position yourself in that smaller group of investors who managed to ride the turbulence out and not be completely wiped out? 

 

[00:01:30] I think the pressures in the economic environment that are intertwined with a rising emotional state of many investors is actually creating a bit of a cocktail of stress that we may not have ever seen before in our lives. 

  

[00:01:45] The underlying premise of the whole weekend was: How do you do the work now, so that later on when you might feel emotional, and your judgement might be clouded, you've done as much as possible to position for the worst outcome if it happens?

Tyrone Shum:   

[00:02:04] I think what I really, really took away from it was not only the great connections that I got to meet people who I've spoken to over the internet and video conference, but also, too, how people perceived what is happening in the market. And seeing that there's opportunities to also look at making improve positions on where they are. 

  

[00:02:25] Because ultimately, no one knows, without a crystal ball, you don't know what's going to be happening in the future of the market. And it's making those tougher decisions to see, 'Okay, should we be looking to pull back on something and not be so bullish on certain things?' Cashing up just to make sure that you've got some reserves? 

  

[00:02:42] Because if things change— and this is what happened during COVID-19, a couple years back— that no one knew that COVID was gonna hit. But there was so much uncertainty in literally that month afterwards, and a lot of people lost their jobs. 

  

[00:02:53] I heard a lot of friends who were saying, 'Man, I'm really down to my last dollar, I gotta go find some work somewhere'. And sometimes, unfortunately, some investors just don't have any cash buffer in place to be able to ride out what was going to happen. 

 

[00:03:06] The market changed completely after about three or four months, it just skyrocketed, and things just improved. But we still need to have that kind of buffer in place for whatever situation was going to happen. 

 

[00:03:16] And it seems like at this point in time, there's so much uncertainty with interest rates rising, government changes, economic world changes as well, too. So did you want to sort of just talk a little bit more about that kind of side of things? I know there's so many predictors or people putting in predictions out there, but no one really knows.

Salena Kulkarni:   

[00:03:39] We talked about how predictions are formed, like, some people use data to formulate predictions or have theories, and then go and find the data that kind of supports those theories. And some people just make up predictions, and then speak with authority. 

 

[00:03:54] So I think the reality is, unfortunately, it's the loudest voices that get the most airtime. And everyone is a guru with the benefit of hindsight, but, we talked a lot about studies that have been done, which kind of verify— out of, I think it was 25,000 professionals that tried to predict who gets it right— and they found that it was just all completely random. 

  

[00:04:22] So I guess the point is that, if we don't actually know where things are going, the best we can do is actually looking at where we are and then make decisions based on the information that we do have in front of us. Rather than trying to predict with absolute certainty. 

 

[00:04:42] There's definitely probabilities and things like that, that we can talk about. We talked a little bit about what is actually happening economically. And therefore, what do we need to do to hedge against worst case scenarios.

Tyrone Shum:   

[00:05:00] And then can we sort of just, I guess, talk from a high level view, from your perception, and I guess you have a lot of great insights into what is currently happening. For people who may not know what's happening in the market, if they're sort of hidden under a rock, maybe perhaps just to sort of give people an overview of what we've been seeing in the market at this point in time. This is currently as we record, I should say, is June 2022. So that will probably give a bit of context of when we are.

Salena Kulkarni:   

[00:05:25] I would actually say this was one of the hardest events I've ever had to prepare for, because it was really opening lots of cans of worms and trying to digest dozens of videos, blogs, articles, opinions, and it was super, super hard. And in the end, I had to sort of throw it all out and step back and think, 'What do our tribe really need to know right now?' 

 

[00:05:58] If I had to give you the top five things that are real right now, is... I think the first thing is the expenses of governments are way bigger than their revenues. I think government debts are bigger than their assets and growing. I think the government looks really wealthy. But they're actually pretty weak because they're spending so much. 

  

[00:06:23] Number four was I think we've got the largest military conflict since World War II that's happening right now. And I think things with the supply chain and inflation are actually, you know, they're accelerating. They're not getting any better. So I would say, if you were going to try and understand what is, those are the sorts of other principles. 

 

[00:06:49] I think inflation is at a 40 year high. There is a very big war brewing. I think interest rates, the threat of interest rate rises, I think the US have come out and said they're going to do at least half a dozen over the next 12 months. The commodity and share markets are already showing huge signs of volatility. [The] supply chain is limping, and growth is slowing. So [the] bottom line is I think consumers and investors are nervous. I think they're nervous. 

Tyrone Shum:   

[00:07:20] I mean, these are signs that are showing and it's like, I guess, our human body. If we are running well, and we're eating well, and we're exercising, our body and mind is humming along really well. And that's what you can say has certainly [been] happening in the last few years.

  

[00:07:36] Even leading up to COVID, we were actually humming very, very well as an economy, and property prices were gradually climbing back up. And then as soon as we had a bit of a shell shock, which is possibly like a virus or flu in our body, then we start to fight against it. And then it starts to show symptoms of runny noses, watery eyes, sleepiness, tiredness, all of those kinds of things. 

  

[00:07:57] And it seems like that's kind of where we're seeing that heading at this point in time. I'm making a funny analogy here, because I couldn't think of any other ones. 

  

[00:08:05] But I guess, if we're looking at it from that kind of point of view, I remember there was somebody in the conference that you had a guest speaker talking about, these were the some of the signs. And you even mentioned some of the signs in the economy showing that, 'Okay, this is kind of where we're heading'. 

  

[00:08:20] And I'm not asking for a prediction, but like, based on previous history, we can sort of understand and see that these are some of the things we need to sort of think about preparing for. We don't have a crystal ball, as we said, but what have you sort of provided to us as a group, as a tribe, that we need to do to start preparing for this, not knowing what's going to happen?

Salena Kulkarni:   

[00:08:44] I think the context I would give all of this is: I'm certainly not trying to be a doomsayer and say that everything's going to turn to crap. But I also, if you look back over history, and this is what the last weekend was really saying— just because we've never experienced something in our life, doesn't mean it hasn't happened before. 

 

[00:09:05] And I think if you believe that, to some degree in the financial market, history is the study of surprises. People are actually pretty good at predicting what's predictable. They're not good at predicting the surprises, like COVID and things like that. 

 

[00:09:24] So given what's happening in the market right now, I think it's prudent to have a high degree of caution about what you're doing. 

 

[00:09:38] I'm always huge on tidying up the house, like, from a financial point of view. Clean financial house, make sure you know what is where, make sure you understand what's performing, what's not performing. Make sure you understand the prospects of every investment that you have. Make sure you're tracking it. All that good stuff. 

 

[00:09:57] But when we're in a very buoyant market where the trend is you can't put a foot wrong, people get a bit lazy about that stuff. And they postpone difficult decisions, and they maybe turn a blind eye to investments that they're carrying, that maybe are underperforming. 

 

[00:10:16] And I guess really one of the big things I was trying to drive home is now, more than any time in the recent past, is the time for you to not be ignoring your housekeeping around your your wealth, and to give it some attention. Because if you don't, and something big does happen in terms of, you know, something adverse, I think there are people that could really be in a lot of pain.

[00:10:44] I totally agree, and hence the reason why it's so important to consider, how can you put maybe cash reserves or buffers in place to be able to sort of mitigate this? And there's no harm in doing it. Obviously, we all like to have all our funds invested [in a] fantastic market, like, we've just had a great run. And no one likes to have cash sitting dormant or doing nothing.

[00:11:04] But as you said, with turbulent times coming ahead— which we don't know, and many surprises— what do you think are additional things that we should consider to sort of prepare for these kinds of things?

Salena Kulkarni:   

[00:11:10] What you've just described [is] the liquidity tension, I call it. When times are really good, people feel bad about sitting on large sums of cash, because they're like, 'Oh, I should be in the market, I should be jumping on a deal'. And holding too much cash feels like lost opportunity cost. 

  

[00:11:40] But I think the flip side to that is that, even with inflation, and with everything going on, cash can really be the ultimate insurance policy. And I think right now, holding a little more cash than usual, is probably prudent. 

  

[00:11:59] I think looking at your debt to value ratios [is prudent]. There's a lot of people who took advantage of more relaxed lending practices over the last couple of years. And investment advisors will often teach you to maximise borrowings and refinance at every opportunity to buy more property. 

  

[00:12:24] And I think if you're— and this is a really important point— where you are on your investment journey makes a big difference about this stuff. 

  

[00:12:34] If you're someone like me, and you've got the benefit of 20 plus years of investing behind me, then if the market took a haircut, and dropped 20%, it's not really gonna make a huge difference to me. 

  

[00:12:50] Whereas if you're someone who's recently getting into investing, and the market tanked or dropped significantly, that could really, really hurt you. 

  

[00:13:01] So I think it's really important to recognise where you are on your journey. And therefore, if the market moved against you, how much damage that could potentially cause. 

  

[00:13:13] I'm usually such an optimist, and so I sort of almost hate talking about this negative stuff. I know that there are people who loaded up with, you know, four to six investment properties in the last two years. And they feel really good about it, because they've made significant equity gains during that time. But they're also on a knife's edge. 

 

[00:13:36] If the market were to drop, not only would they lose those, but potentially put themselves under massive cashflow stress, which is probably the more important thing. 

 

[00:13:47] We talked a little bit about the experience that people had during the Great Depression. And it almost didn't matter how much capital you had. What saved people or what how people got by was cash, and cash reserves. So having investments that are self sustaining, or deliver strong, predictable cash flow is really, really important. 

Coming up after the break, we explore more of what Kulkarni shared during her conference…

[00:15:22] One of the things I talked about was this idea of postponing pain.

We delve into a case study that shows why resources, not appearances, are gold…

[00:20:17] The challenge is like, on the surface of it, they have an enviable property portfolio. And they're doing really well. 

She outlines another case study that doesn’t end like you may expect.

[00:25:09] Janine and Mike had a more modest six investment properties, worth about $4 million. And they had two properties that were clearly underperforming for various reasons.

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

Tyrone Shum:  

Moving onto case studies, Kulkarni delves into Polly and Raj’s portfolio. While their names aren’t real, their situation certainly is.

Salena Kulkarni:   

[00:14:59] One of the keys that we talked about on the weekend was: You've got to make the hard decisions now. While your head is clear, and you've got the time to actually take action. Things like really questioning how much cash you should be keeping, looking at your leverage. 

  

[00:15:22] And one of the things I talked about was this idea of postponing pain. And I think when times are really good, you can get away with carrying some dogs in your portfolio, or underperformers, or even assets with negative equity, because you don't have to address it. 

  

[00:15:40] But I think right now is the time to be looking at those and saying, 'Well, yes, I might take a small haircut if I realised that loss or get rid of that dog, but it just reduces the pressure on me and stabilises my position massively'. 

  

[00:16:00] So the reason and the context for showing a couple of case studies and Polly and Raj, I'll describe them— but essentially, was really just, if you have that filter that maybe it's going to be busy... In my lifetime, basically everything, including the global financial crisis, was a blip in terms of the impact it had on the Australian economy. 

  

[00:16:26] In fact, if anything, it created vast opportunity in the alternative space. But in terms of the Australian property portfolio, it flatlined a tiny bit, but still nothing much happened. So in my life, nothing catastrophic— from a financial perspective— has happened. But I don't fool myself into thinking that it can't happen.  

  

[00:16:48] The story of this couple was shown through the filter of: Yes, there's a lot of pretty big stuff happening in the market right now. And I am totally against predicting with any certainty what will happen. But is there a chance that something pretty serious could happen? We talked about the ATO tax debts, and things like that, like there's a lot of storms coming through. 

  

[00:17:15] But with Raj and Polly, essentially, they are a couple who own a very large portfolio of properties [of] two bedroom units in Melbourne and Sydney. [Their] portfolio is worth about $19.2 million, [they] had a debt of about $14 million, and were on an average interest rate of about 2.48%. 

 

Salena Kulkarni: 

[00:17:40] Their net rents [were] $63,000 positive, so they're in the black. But they were being forced to pay additional principal repayments of $144,000 a year, which was taking them into the red. 

  

[00:017:55] They had a fantastic business income of just over $500,000. But their lifestyle expenses were $400,000 to $450,000. And their cash reserves were only about $110,000. So when I put this up as a— like, these are real people— in the context of everything that we're talking about, it becomes immediately apparent that there's some vulnerability there. 

  

[00:18:20] Because they've got a reasonable amount of leverage. They've got very little cash flow. They're already carrying a negatively cash flowing property, even though it's in the black as far as technically. 

  

[00:18:34] And this is something that I've heard people talk about across the board. This whole idea that the banks, because they're becoming more conservative, they're forcing people into higher and higher principal repayments. So even where you've gone and negotiated a really great interest rate, if your principal repayments are really high, that can scorch your cashflow super fast. 

  

[00:18:57] And even though it's forced savings to pay down debt, it still can really hurt during a tough period. Like, if something happened to their business, and they couldn't earn that money anymore. We don't have a lot of transparency here, but how quickly could they scale back their living expenses from $450,000 down to something, maybe half that?

Tyrone Shum:   

[00:19:26] It's huge. I mean, that seems to be a very, very nice lifestyle, I have to say. Spending that kind of money every month, that's like, almost $20,000 a month. Yeah, more actually, sorry. It's almost $40,000 a month. 

  

[00:19:41] Wow. Yeah, I guess it's really discerning and there's [a] huge risk for them. Because if, as you said, business changes, rates go up, which means that they have to pay more towards to pay down their debt, what will they do? 

  

[00:19:56] I mean, obviously, they can't go and find more business income just to sustain their life[style]. So they've got to make some really hard decisions. And it sounds like they may have to do some personal reductions in terms of their lifestyle expenses, increase their cash reserves, and potentially look at maybe even selling down some of their debt. So that way they can actually pay down their debt as well.

Salena Kulkarni:   

[00:20:17] The challenge is like, on the surface of it, they have an enviable property portfolio. And they're doing really well. But as we looked back at some case studies for people around the Great Depression, which I think is the nearest equivalent of a massive fracture to the economy, there were people who were minting money, and it just evaporated. And they were left in a situation where they just didn't have the resources behind them to back it up. 

  

[00205:49] So it's not so much that I'm showcasing them as people who have done the wrong thing. But potentially there's not a lot of fat, or cushioning, in what they have.

Tyrone Shum:   

[00:21:04] That's, I think, the key point that I got from that, is making sure that no matter what times, if we continue to have great times, and the government comes in and prints more money, as we talked about. And the cycle happens again, where it pushes prices up, and things keep going, then that might give a bit of comfort for people. 

  

[00:21:25] But if we do go through turbulent times, and you don't have those cash reserves, you need to dip into somewhere to be able to fund whatever you're doing right now, whether it be your portfolio, lifestyle, etc. Then how much pain will that cause? And what are the risks involved? 

  

[00:21:37] And that's kind of opened up my eyes to go, 'Okay, gosh'. Not that I wasn't paying attention. But I need to start thinking about, 'Should I have six months' worth of emergency funds sitting along the side, or 12 months, or whatever it is?' And to start thinking about, 'Okay, how do I reduce my exposure to certain property investment opportunities that I'm currently involved in as well, too?'

Salena Kulkarni:   

[00:21:59] You know what, Tyrone? I mean, this is really worth mentioning. At the beginning of COVID, in March of 2020, I think the whole world got a taster of the fear of what it could be like if everything turned to custard. 

  

[00:22:16] There was a period of about a month, between when everyone thought, 'Oh, my God, the world is ending, the sky is falling', and then the government stepping in with the stimulus and support packages. There was a period of about a month where everyone was panic-stricken. 

  

[00:22:35] And I guess the point I'm making is that it was just a taster. And we would hope that the government would always come to the rescue, but I just think we can't hang our hats on that. We don't necessarily know that that will happen.

Tyrone Shum:   

[00:22:53] Oh, no, of course not. And that was the thing. I mean, as I was saying earlier, I had colleagues and friends that I was working with, and as I knew they still had work coming in and stuff like that. But as soon as COVID hit, their jobs contracts ended. And then as I said, they only literally had like a week's worth of savings put aside. 

 

[00:23:13] And they said to me, 'What are you going to do?' And I said, 'Well, I'm okay. Not to boast or anything, but I intentionally had cash reserves put aside, which I always do just for times like this'. 

 

[00:23:25] I guess I'm quite cautious a lot of times, but I guess for listeners out there who haven't had any cash reserves put aside and put all the money into investments, it's probably a good idea just to keep some cash reserves. 

  

[00:23:36] And I've interviewed a number of property investors in the past on my show, who have always said they've got at least six months' worth of living expenses covered, just sitting there, just in case. 

 

[00:23:44] I know it sounds like it's money that's not being utilised. It sounds like it's just not being invested. But it's actually a good thing to have there. Because it gives you a bit of buffer and certainty. And that's what I think we all, as investors, really want, is that certainty. If anything does turn to custard, will you be able to survive and get through this tough time? And if you can't, then that would be your biggest risk.

Salena Kulkarni:   

[00:24:18] I think the big takeaway that I wanted to really drive home is: Are there any difficult decisions that you need to make about your wealth? Because if there are, do them now.

Tyrone Shum:   

[00:24:29] Absolutely. And thank you for reminding us. Yes. We love to share our own stories. And it's just giving you an insight into what we currently do. 

  

[00:24:45] One thing I do want to also add as well, there was another case study that you mentioned, for Janine and Mike. And I wouldn't mind just giving that comparison. This is slightly from the other end of the spectrum. And what you've seen from that case study that might be also potential risks or things that they need to also try and consider. Even though that might be a tough decision to make.

Salena Kulkarni:   

[00:25:09] Janine and Mike had a more modest six investment properties, worth about $4 million. And they had two properties that were clearly underperforming for various reasons. One of them was being rented by a member of the family, and was costing them about $20,000 a year just to cover interest. And it was about to revert from a 1.98% fixed rate to a 3.5% variable.

Tyrone Shum:   

[00:25:37] Ouch, that's twice.

Salena Kulkarni:   

[00:25:40] And then the second was they had a couple of properties in a mining town that, at its peak, was doing really well. But now they're worth two-thirds as much and really bringing in rubbish cashflow. Negatively cash flowing, but to sell them would be to realise a loss of $150,000, but would free up about $300,000 in cash. Their current cash reserves are less than $35,000. And they both have $2,000 per week [of] discretionary spending outside their bills. So that was kind of their story.

Tyrone Shum:   

[00:26:18] Yeah, and I guess— I'm not giving any financial advice here— but I'm looking at it from a less emotional state. If they are, in this point in time where the market hasn't turned, or things have gone sour, or, you know, really, really turbulent times as such, it might be actually a good time to consider: What can they potentially get for these properties if they have to free it up? And that way take the burden off.

  

[00:26:40] Sometimes it's actually okay to let go of a dog or let go of a lemon, and free that space, because it does cause a bit of stress. You're thinking, 'Wow, it's needed cash flow, it's worth only a third [of what it was]'. [If] you keep that over your head sometimes, it just affects you mentally. 

  

[00:26:55] But once you let it go, imagine the headspace that you have. And you don't need to necessarily jump back into something straight away, but it frees your mind to go, 'Okay, this potential opportunity is here that I could look at down the track', and you're not restricted. So I guess these were very, very good case studies that we had a look at. 

 

[00:27:13] And note that these names are not real— these are real case studies, but the names we've had to replace for privacy purposes. But I think they really showed some good examples of what potentially people's lifestyles and people's portfolios look like, and how to potentially look at it from a different angle and mitigate some of the risks that we were talking about.

Salena Kulkarni:   

[00:27:33] You've raised some really good points, Tyrone. I think, with this particular couple, they don't have a lot of cash reserves. They've held on to these properties that haven't performed. And, you know, as someone who supports a lot of people in the wealth space, I don't think it's my job to ever be prescriptive. But it's definitely important that they see they can't do much about the property that the mum is in, because that's family and they want to keep supporting her. 

  

[00:28:03] But having an extra $300,000 in cash and just realising that loss and using it in the future could actually be a sensible decision. But [it's] one of several decisions that they could consider. But yeah, their cash reserves being as low as they are is definitely a bit of a red flag.

Tyrone Shum:   

[00:28:22] Totally. So hopefully, we've shared quite a lot of things in this one. I think the main thing we wanted to just give as a takeaway is really: Make those hard decisions now rather than later. I mean if you delay it, there'll be more pain down the track if things do turn. But at the same time, because people are less emotional because you've just gone through, say, a really, really very buoyant time of couple of years of COVID, coming out of that and so forth. It is an opportunity to start to review and consider what your situation is at this point in time. 

  

[00:28:55] So obviously go out, seek some independent legal advice and financial advice from people who you trust and hopefully this episode also has helped you as well. 

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