In this episode, we dive into the waters of alternative investment strategies. While sometimes these waters can become overrun with sharks, Kulkarni has the tools to tackle it head on to help you emerge unscathed. By taking simple steps that you already have in the back of your mind, she explains how you can de-risk your alternative investment and reel in the rewards.

Timestamps:
01:15 | Alternatively…
 05:16 | Potential Risk vs. Possible Rewards
 06:58 | The Big Question
 08:54 | The Anomaly That is Australia
 12:05 | You’ve Gotta Watch Out For the Quiet Ones
 15:44 | Beware: Sharks
 17:18 | The Waiting Game
 20:20 | Research and Track Records
 26:09 | Look Before You Leap
 
 Resources and Links:

·        Bernie Madoff

·        Ponzi scheme

 Transcript:
Salena Kulkarni:

[00:05:18] The way to de-risk any investment is to increase your level of knowledge. And that can be either through formal education or mentoring or guidance of some sort. And I think really, the real risk is not taking any action. 

 

 

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 dispels myths surrounding alternative investments, outlines the main fears and concerns she hears regarding them, and explains how they can tie into the wealth game.

 

 

 

 

Tyrone Shum:   

When it comes to investing into alternative strategies, the word ‘alternative’ can stir up fears for many people. It’s often a new field for scores of investors, as opposed to the traditional methods they’ve used in the past. Kulkarni regularly deals with these fears and concerns regarding alternative investing, and shares a handful of the most common ones she comes across.

 

Salena Kulkarni:   

[00:01:15] When you use language like 'alternative', it definitely conjures up something really scary, and maybe could be dodgy, could be illegal, could be a scam, those sorts of things. But in broad terms, alternative investments are really this very vast bucket of strategies and investments, which basically sit outside of [the] mainstream. 

 

[00:01:42] And what that means is that they're often in markets which are less regulated. If you think of it as a spectrum, down one end you have things like venture capital, hedge funds, seed capital, and everything that's the Wild West, really. 

  

[00:02:01] And then down the other end of the spectrum, you have alternative strategies, which are investments which are backed by real property. And that's the end of the spectrum that I tend to sit in on. I'm a pretty conservative sort of person. 

 

[00:02:17] Alternative just means outside of [the] mainstream. It doesn't mean weird, it doesn't mean risky. And I guess one of the things that I coach people on is the idea that just because something's unfamiliar doesn't inherently make it risky. 

  

[00:02:32] And so when you kind of start to put your head into this world and start to understand it, you can see that in many instances, a lot of these alternative investments are actually lower risk than what we deal with in [the] mainstream. And that's partly because you can eliminate sentiment, and a lot of them have more immunity to volatility and things like that. So, I think it is a broad kind of description, but I sort of sit squarely into investments that are backed by real property.

 

Tyrone Shum:   

[00:03:07] That's what I love about this particular space as well, too. Because we know, as property investors, when you've got a property, it's a tangible asset. It's not like the share market where you get a paper, and hope that the company is still doing well, and so forth. You actually have a security that is backed by property. 

 

[00:03:24] So if something does happen— touch wood it doesn't— you can go back and there is actually some value on it. Because if you've done your homework and due diligence, there's usually a valuation that determines how much this particular asset is particularly worth as well, too. 

  

[00:03:37] And what I'll add as well, and you said this really, really well, is that people are fearful sometimes because alternative [strategies] may sound risky. 

  

[00:03:49] In my opinion, I guess risk is how much are you willing to sacrifice, in a sense, to be able to achieve an outcome that is going to ultimately give you a reward. And everyone's got different levels of risk appetite as well. But in this sense, is that everything that you do, regardless of whether [it's] property investment or driving down the road, there is some level of risk. You've just got to determine how much risk is involved, and then make an educated decision behind that. 

  

[00:04:18] Because ultimately, if, say, for example, driving a car, if you've never driven a car before, of course you're gonna say it's risky, because this is the first time you've driven it. You're definitely going to have a higher chance of crashing into people. But because you've taken some training, you've educated yourself on the rules of the road and so forth, there's a very unlikely chance that you'll have any accident and therefore your risk is mitigated. 

  

[00:04:38] And I'm putting that in this example because hopefully it's easy to understand. It's the same thing as property. And I've learnt over the years, doing these types of things, is that if you actually can determine what is the level of risk that you're willing to take, and then how do you mitigate that risk by educating yourself or by doing the due diligence, you can actually get to a level of comfort. 

 

[00:05:01] You go, 'Okay, this investment seems to be quite minimal risk'. And therefore, can produce a very good return. And I guess that comes with experience at the end of day as well. So that's why I just want [that], to add to make sure that investors also understand that point of view.

 

 

Salena Kulkarni:   

[00:05:16] I agree with everything you're saying. The way to de-risk any investment is to increase your level of knowledge. And that can be either through formal education or mentoring or guidance of some sort. And I think really, the real risk is not taking any action. 

  

[00:05:36] The metaphor, if you're going to go there, is that it's a bit like going to university and then not going to any lectures or tutorials, and then being frustrated that you're not employable.

 

Tyrone Shum:   

[00:05:47] Not only that, you don't even get any grades, because you haven't been turning up to any of your exams. So you can only blame yourself for that. 

  

[00:05:56] I think what's interesting is that as I mentioned, I get a lot of people raising their concerns and fears about this type of space. And probably one of them that usually gets raised up a lot— and I guess I'll put it in more of context— is that, say, for example, you're investing into buying a property. And the average return, if you get a good deal, is maybe between five to 6%, up in the north of Australia.

 

[00:06:20] But when you actually break [it] down, and have all your expenses and so forth, you might net maybe between one and 3% as an investment property. 

 

[00:06:29] A lot of what we've been looking at in this investment space is anywhere between 10 to 20%. It could be anywhere in that vicinity or that range. And people go, 'Wow, that's a fantastic return. I don't have to buy a property necessarily, I don't have to go out and do so much time and research to buy this kind of property. And then at the end of day to have to go to the bank and get the money', and all those kinds of things, which can be a headache in one sense. 

 

 

Tyrone Shum: 

[00:06:58] You can literally just put your capital in this and get a fixed return when you choose the term or you find a term that's suitable for you. And I guess the biggest question that they've always asked me is, 'How is it possible that we can get these kind[s] of returns? Why is it not publicly available?

 

Salena Kulkarni:   

[00:07:18] It's the perfect question. Why can you generate extremely high returns, comparatively, in the alternative space compared with mainstream? 

 

[00:08:11] I think ultimately, the reason that the returns are as high as they are, is the way that the deals are structured just allows for those kind[s] of metrics. 

  

[00:08:21] For example, if you were doing a lending deal, which is one of the five buckets of alternative strategies— you've got lending, joint ventures, syndications, private funds, and then direct property, which is the one that everybody knows. 

  

[00:08:38] But if you're doing a lending deal, and your loan is the difference between the deal working and not working, but it's still a great deal, then they're going to pay a premium. So that would be how it would work in your case.

  

[00:08:52] In my case, a lot of the alternative investments that I really love is that they're in markets, other markets outside of Australia, where the price of real estate [is] relative to the income stream is just completely different to here. 

 

 

Salena Kulkarni: 

[00:08:54] A lot of people don't realise that Australia is a little bit of an anomaly. The way that our market has evolved is there's only one way to transact real estate. And the fact that it's a national pastime has really pushed prices through the roof. We've had a lot of interest from foreign investors over time, because it's such a stable market, which has also contributed to runaway capital growth. 

  

[00:09:38] And so all of those things combined [have contributed]. And then you look and you say, 'Well, why haven't rents gone up in parallel?' And part of the reason— and I was talking to someone about this the other day— is wages growth can only go so far in terms of pushing up rents. So we're in this strange situation now where property prices are astronomical, rents are relatively low, and so it's really hard to structure deals creatively here to squeeze out income.

  

[00:10:08] Whereas in other markets— and I'll give an example— you could buy a nice quality property for, say, $150,000, that pays $1,500 a month. And so when you're looking at metrics from that perspective, you can see why you can get 10%— let's use that as the low bar— eight to 10% net, after all your expenses, all day long, without taking any significant risks. 

  

[00:10:40] And that's why the numbers work. And that's why it's not that there's a greater risk, it's just that the mechanics and the economics of one market have evolved really differently to ours.

 

Tyrone Shum:   

[00:10:53] I totally agree with you on that side. Because sometimes it's just about who you know, really, to be honest, to get access to these type[s] of deals. And there's so much noise in the market saying, 'Look at me, I've got a fantastic deal. This is great'. 

  

[00:11:08] And a lot of people out there are usually salespeople trying to sell you property, so they can make a comm, or commission, if people don't know what comm means. But I think ultimately it comes back down to your strategy and making sure that that fits into your strategy. Because if alternative strategies is not what you are looking for at this point in time, then you obviously won't be out in the market to find it. 

  

[00:11:30] But if it suits you, and you're looking for another way to be able to accelerate, to grow your portfolio or to generate additional income, then this would be a fantastic option to look into. 

 

 

Coming up after the break, she explains how numbers aren’t always as black and white as they seem…

 

[00:13:57] Property people [and] experts do it all the time. Here is the profit and loss projection and the growth projection for this asset. But the thing is, as an accountant, I can say it's very easy to fudge those numbers. 

 

How everything ties into her three part wealth building game…

 

[00:18:51] That is when taking a small piece of that capital, and looking at how you could leverage the cash flow inside of alternative [strategies] makes sense from my point of view. 

 

She explains how everybody involved needs to have their judgement hats on at all times.

 

[00:23:26] From a diversification point of view, it's hard for someone to really argue that there would have been a safer way to do it. 

 

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

 

 

 

 

Tyrone Shum:   

A common question when it comes to alternative investing is ‘What happens if the deal goes south?’ After over a decade in the alternative space, Kulkarni shares the wisdom she’s garnered when it comes to this specific concern.

 

Salena Kulkarni:   

[00:12:05] I personally believe, after having been in this space for 12 years, [is] that the best deals are certainly not ones that get advertised through marketing channels. They are done in private networks. 

  

[00:12:21] I've learnt the hard way, and I've certainly had a lot of cuts and bruises. If they're marketing or advertising for investors, that's questionable. I mean, that's a bit of an exclamation mark, or red flag for me to start with.

  

[00:12:35] With the deals that I tend to do, one of the things that I'm looking for— and this is part of the journey that I'm on, is levelling up people's ability to think as a sophisticated investor— is around having really strong rules for what you're looking for when you do due diligence on a particular trusted advisor or deal or how deals get selected or whatever. 

  

[00:13:02] And one of the things, amongst many, that I'm looking for is I want to understand: What is my downside protection? Are there multiple exit strategies? Or is there only one way out? And the guys that I work with, the trusted advisors that I've cultivated, who really formed part of my inner circle, they can articulate really clearly that they have multiple exit strategies. [They can articulate] why there is good downside protection, how much speculation is involved in the deal. 

  

[00:13:32] And this is the number one thing: What is the risk adjusted return? I was talking about that with an investor earlier today. And I think, in property investing— and in any investing, generally— it's really easy for someone to show you what they call a pro forma, meaning a projection or a profit and loss statement on 'Here's how this investment is going to perform'. 

 

[00:13:57] Property people [and] experts do it all the time. Here is the profit and loss projection and the growth projection for this asset. But the thing is, as an accountant, I can say it's very easy to fudge those numbers. And what you really want to do is be looking for opportunities where there's a little bit of stress testing going on. Because you can't predict with any great degree of certainty how things will pan out. 

  

[00:14:23] My preference is to look at: Where is the profit and loss on that asset today, or that investment today? Tell me what you're going to do to improve that. But don't try and bake in some projection around growth. 

  

[00:14:41] In today's terms, how is that deal going to be structured? If you were to apply a level of risk to that return, where does it take me? Because it's really easy for— especially in the alternative space— for someone to say, 'Oh, yeah, that's a 15% net return'. 

  

[00:14:59] And it's not that those deals aren't possible. But I'm always asking and looking for depth around how much risk is attached to that return. So there's no shortage of investments out there in the alternative space. That's probably one thing. Once it's on your radar, it's a bit like the whole reticular system, when you start thinking about buying a red Commodore, you see red Commodore everywhere. 

  

[00:15:25] It's the same with alternative [strategies]. You start putting your head in there, there's no shortage of people out there. But the truth is, wherever there's opportunity, there's sharks. So you've got to be someone who's got a great game plan. And who knows how to ask the right questions and do good due diligence.

 

 

Tyrone Shum:   

[00:15:44] And also have a group of trusted advisors you can seek advice from as well, too. Because, yes, as you mentioned that plenty of sharks out there. And I've been caught out by a few in the past, and I've lost money in that, thinking that [it was a] fantastic deal. It's easy to just go, 'Wow, it looks amazing'. Put the money in there, and you'll never see it back. 

 

[00:16:05] And that's what I vowed in my own business to make sure that doesn't happen. Because I will do whatever I can, even if I have to pay with my own money, to be able to pay the returns back to my investor. I will do that. Because that's just part of me. 

 

[00:16:18] Just like you, as I said in the past, that we do a lot of due diligence in what we look at. And it's so, so important to look at that path in that aspect to make sure. And asking the right questions is always great and very, very important as well, too. So that's excellent. 

 

[00:16:34] Another concern or fear that a lot of people have is: Will I be able to afford to put money into these things? Should I be buying an investment property first, if I don't have much of a capital base? Or should I be putting my money here to be able to sell it on my growth and do that? 

 

[00:16:54] I'll put an example in place. Say I've got maybe a couple investment properties. I've got, you know, maybe a $1 million asset, and I've got maybe a couple of hundred thousand dollars to invest into this. But these deals look amazing, I need to put in a reasonable amount of money to be able to get a good return. Should I be putting all my money into these types of alternative investments?

 

 

Salena Kulkarni:   

[00:17:18] I think that the heart of that question is really: When is it the right time to be thinking about alternative [strategies]? And we've talked about this in the past. I think part of the journey that you're on as an investor is recognising what part of the game you're in.

  

[00:17:33] If you're a completely new investor, and you're in a situation where you've got limited income, then I would say the highest probability for success lies with building capital first. And there's no better vehicle to do that [with] than traditional property. 

  

[00:17:51] Part of wealth building, I think, is having patience. And recognising that, 'Okay, this is the part of the game I'm in, I've just got to do the hard yards, there's no shortcuts, there's no silver bullet'. 

 

[00:18:04] So if you're in the first part of your journey, which is I need to build capital. And for everyone, from a timeline point of view, that's going to vary. For some people that could be as little as five years because they happened to buy in growth markets or a growth cycle, and they've got good income, and that allows them to borrow and blah, blah, blah, you know, there's all those variables. For other people, it might be 10 to 15 years. 

 

[00:18:30] But when you reach that point where you feel like you've optimised what you have, you've maybe even hit a limit with your borrowings, and you're looking at your portfolio, you can see that it's kind of on a trajectory that will get you to a reasonable net worth in time. But you want to start to take control and speed things up. 

  

[00:18:51] That is when taking a small piece of that capital, and looking at how you could leverage the cash flow inside of alternative makes sense from my point of view. So I call that part two of the game, which is really about: How do I take this terrible— and I say this with much love for Australian real estate, but— just super crappy cash flow and change the trajectory so that I can actually start to, you know. 

  

[00:19:18] And really, what this boils down to: How do I change the cash flow, not for the sake of it, but also so that I can actually design a life that I want? Which may or may not involve staying in the work that you do, it could be a career change or spending time with family or pursuing passions. 

  

[00:19:38] And then, the third part of the game is really the refinement and the legacy piece where you start to cultivate annuities, which is the blending of the assets that you might have already had with your alternative [strategy]. 

 

[00:19:53] I think timing is really about the recognition and the wisdom about where do you want [to go]? Which part of the game are you in? Where do you want to be?

 

Tyrone Shum:   

[00:20:06] That's a really, really good point. And, yeah, I think everyone's situation is going to be different. And everyone's going to have a different journey. And [you've] just got to figure out what's going to be the best and right time for anyone who wants to jump into these as well. Excellent. 

  

 

[00:20:20] Another fear or another concern that I've had raised [to me] in terms of question wise, is: Let's say you've done a bit of research on the sponsor. And if there's been a good track record from advisors saying that they've had a good amount of great deals and the deals look amazing. But then there's maybe one or two bad reviews online— you don't know where it's come from, but it is obviously a genuine review. How do you handle situations like that? 

 

[00:20:49] Because if the sponsor has had a good track record, you've dealt with them for a long time. And they've had great deals that other investors have invested in and have no issues with them. But they've had some potentially bad reviews online because of one deal, maybe delayed, or whatever it is, and somebody has gone ahead and complained. Or maybe it could be a competitor who's left a bad review as well, which is also possible. How do you handle a situation like that?

 

Salena Kulkarni:   

[00:21:16] As an investor, you would ask the question. 'Tell me about this. What's that about?' Sometimes there's a reasonable explanation and sometimes there's not. I think the thing to recognise is that squeaky wheels will complain. 

  

[00:21:31] And even outside of investing, if you look at Google reviews for restaurants, and things like that, if you have an exceptional experience, you might post a Google review, if you can be bothered. 

  

[00:21:46] But if you have a bad experience, you're very quick to post it. Not me personally, but I see that people are very quick to post reviews. 

  

[00:21:54] But I think that the thing to remind yourself of is there's no guarantees with any form of investing. The journey for most investors is about looking at all the different strategies and opportunities that are available to them at any one time. And then assessing which ones are in alignment with their goals, and then layering that with some analysis of 'How do I take everything about this opportunity, and identify the risks, and figure out what I can mitigate and what I can't?'

  

[00:22:30] Because the truth of the matter is, there are no guarantees. If things were guaranteed, everyone would be investing in it. But predominantly how I invest now is I invest with my trusted advisors only. Like, I don't go out there looking for new opportunities that I can't vet, basically. 

  

[00:22:53] I look at it from the viewpoint of, let's say you go into a deal, and it doesn't work out. Even after all of the things that you did right. The worst outcome I see is that, first of all, I'm putting small amounts of capital into many, many deals. So I'm spreading the love and the risk of something going wrong when I've built such a... you know, I'm investing across different geographies with different dealmakers, with different strategies, with different liquidity points, in different assets. 

  

[00:23:26] From a diversification point of view, it's hard for someone to really argue that there would have been a safer way to do it. So the worst outcome in my mind is that I invest in a deal, my judgement is poor. Their judgement is poor. The deal sponsor's judgement is poor. And that could happen with obviously any investment. But the goal is to stack the odds in your favour. 

 

[00:23:58] Investing is really about de-risking as much as you can, and stacking the odds in your favour. I believe that— given what I know about alternative real estate and traditional real estate and the share market— I feel alternative investments are actually one of the least risky asset classes out there. 

 

[00:24:21] What a lot of people do, and they think it's safer, is they take their hard earned money, and they put it into a big, publicly listed fund of some sort, like whether it's a Super fund or a managed fund of some sort. And they believe that to be safer. But the truth and the reality from my perspective is: The people who manage those funds, they get paid whether their investments succeed or don't succeed. 

  

[00:24:51] In my world, the way that the people, the trusted advisors that I work with operate, is you get paid first as the investor or I get paid first as the investor. And then they get paid after I've earnt a certain rate of return. So I like that, because that seems fair to me.

 

Tyrone Shum:   

[00:25:09] That's basically performance based. You're not in it just to basically send out any deal but to actually ensure that the deal is successful for them, and also for us as well, too. Making it very less risk[y] in that sense to look at that, because they've got their own interests. 

 

Salena Kulkarni:   

[00:25:27] Can you imagine if any of these big listed, managed funds, turned around and said, 'Actually, we're not going to pay ourselves unless we get a really good result for you'? I mean, I just... yeah, sadly, I can never see that happening. And I think that's part of why the wealth industry is flawed, to be honest.

 

Tyrone Shum:   

[00:25:47] A lot of times, the financial advisors recommend stuff, because they're selling it, but they don't actually have their own money in it. And that's not what this is all about. I invest into a lot of these deals that I share. If I had the money, I'd invest into every one of these. But I'm only limited by certain amount of capital every so often. So it's a very, very good point that you've raised there. 

 

 

Tyrone Shum: 

[00:26:09] I guess the last thing I probably wanted to ask is: How do you determine, or maybe share, what are some of the potential risks that you have seen? And maybe just talk about some of the mitigation strategies behind some of these.

 

Salena Kulkarni:   

[00:26:27] I'll start by saying the words Bernie Madoff. And for those people who are listening, that don't know who Bernie Madoff is, he has gone down in history as being the mastermind of one of the worst Ponzi schemes in history. And Ponzi scheme, meaning you take money, you pretend to invest it, and then you use new money coming in to pay the old investors and you just keep building, basically, a hollow investment. 

  

[00:26:57] And I know that the elephant in the room for a lot of people is: How do you know that something's a Ponzi scheme, or not a Ponzi scheme? Or a Bernie Madoff type situation? And again, I think it sort of loops back to the comments I made earlier [of] there's no guarantees. 

 

[00:27:12] But what you want to look for is [a] proven track record. Can you talk to past investors? Can you talk to people who've maybe been investing for 20 plus years with that trusted advisor? What sort of audit process do they allow for? Do they have an independent administrator? How transparent are they with their reporting? How often will they report? What kind of information can you expect? Past performance? Everything that we've talked about today, risk adjusted returns, those sorts of things. 

  

[00:27:49] Because if you look at— and I believe there's a movie about Bernie Madoff, which I've got it on my list of things to watch— but essentially, in those circles, what was happening was ultra rich people. And what people don't know about Bernie Madoff is he was at one point, actually one of the most successful hedge fund managers. So he had a period of legitimately being very successful, and then sort of lost his way, in later life. 

 

[00:28:19] But the people who wanted to give him money were giving it to him blindly. 

 

Tyrone Shum:   

[00:28:24] Because they trusted him. 

 

Salena Kulkarni:   

[00:28:26] It's kind of like, 'Well, you had a track record of performance. So I'll just assume that my money’s safe'. And I don't know that that's the smartest way to invest. So one of the things I say to my clients is: When you're talking to these trusted advisors, there's no dumb questions. Don't be afraid to ask the questions that nobody else wants to ask.

 

 

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