In this episode Kulkarni dives into a case study featuring a client with a dozen properties valued at over $10 million. What sounds like a dream to most of us turned out to be more of a nightmare to client Ben, who felt he’d hit rock bottom trying to sustain his properties and keep his head above water. Ben’s situation is far from uncommon, which is how Kulkarni was able to recognise and lay out his options, enabling him to go from -$175,000 to $80,000! She explains what those options were, how they may be able to help you, and gives a maths lesson: Just how do you get to $100,000 in passive income in five years?

Timestamps:
00:32 | Every Day I’m Hustlin’
05:29 | The Land Tax Trap
08:47 | Keep Your Eyes on the Prize
10:52 | The Golden Goose
14:02 | Where’d This Property Come From?
15:59 | Ben’s Options
18:18 | Pick a Lane
21:34 | The Power of Leverage
24:41 | Get Out Your Maths Textbooks

Resources and Links:

[00:07:24] He started investing, I'm going to say 25 to 30 years ago. And he had some primo real estate. Like, enviable real estate in that portfolio that anyone would love to own. But it just surprised me, because some of those properties were bought 20 plus years ago for a song. Like, really disparate bargain[s]. 

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 we dive into how the size of your portfolio, even if it’s worth $10 million and consists of 12 or more properties, doesn’t necessarily add up to an early retirement.

Tyrone Shum:   

Kulkarni has worked with a lot of investors over her 12 years in business, including those with multi-million dollar property portfolios. While it appears to outsiders that these portfolio owners have everything they could ever need and more, sometimes things aren’t quite as simple on the inside.

Salena Kulkarni:   

[00:00:32] It's a really interesting topic. And certainly one that's very dear to my heart. I think the sorts of people that I talk to are people who have definitely tried to follow the guidelines of the property investing playbook 101. They've exhibited delayed gratification, they've gone out there and accumulated as many properties as they can. They've hustled to get good lending opportunities. 

  

[00:01:01] But the problem that they face is even as their portfolio starts to grow, and their net worth goes up, they're still finding themselves in a situation where— and it's kind of the problem that we have here in our market— the income in rentals just aren't keeping up with property prices. And so they find themselves in a situation where net income is just really, really poor, if not negative.

Tyrone Shum:   

[00:01:25] I guess my question is: Why do you think that's been the case in the Australian property market? And perhaps we could talk about an example, because I'm trying to put this in context as well. But why do you think rentals haven't kept up with, say, for example, the appreciation of property?

Salena Kulkarni:   

[00:01:42] There's probably a very complex answer. I mean, everyone with the benefit of hindsight probably wishes they bought more properties 20 years ago. I think there's probably a few factors in play. 

 

[00:01:56] People can only pay so much rent. Incomes are finite, and already as a percentage of everyone's average, median income, renting makes up a good proportion of that. So if wages don't keep pace with the rising price of property, then they're gonna tap out pretty soon. And I think that's what's happened in Australia. 

  

[00:02:20] On the flip side, when I compare to other countries, Australia has a voracious appetite for wealth building, and particularly property. You would have heard me say every man and their dog in Australia seems to have an opinion on property and fancy themselves as pretty well versed in property. 

  

[00:02:43] And as we've anything that's based on supply and demand, I think the price of real estate has gone up in leaps, at different points for different reasons. So, there was definitely a period during, say, for example, the mining boom, that drove up a lot of real estate.

  

[00:03:05] We had a period of time where a lot of foreign investors were coming to Australia, because they perceived it to be safe. So again, that sort of put a squeeze on demand and pushed up prices. 

  

[00:03:18] And now we're kind of in a situation where there are a lot of hungry investors looking to property as a way of either building a bit more of a nest egg in retirement, or trying to reduce the timeline to get to retirement. So they're probably the two motivators. 

  

[00:03:38] I don't know that it's necessarily a straightforward answer as to why everything's gotten out of whack. I would say it's probably cultural as well as some limiting factors around how much we can actually spend on rents.

Tyrone Shum:  

[00:03:54] Let's take a look at an example then, of potentially maybe one of the case studies that you've had, where we could look and potentially look at the numbers to understand the differences. Because say someone has a multi million dollar property portfolio— and I guess I'll let you share this case study— how much income would they be potentially generating from, as an example?

Salena Kulkarni:   

[00:04:20] I think there's a real myth going around that if you hit a certain net worth— meaning the amount of real estate you own relative to debt— that that will solve the financial freedom problem. 

  

[00:04:34] But I just talked to dozens and dozens of investors every month who tell me that they have the multimillion dollar property portfolio, but they still feel like they're mile[s away from retirement]. They're no better off, is how they feel. Rich on paper, poor in cash flow. 

 

[00:04:53] The case study that I'll mention is one of my clients who, when they came to see me, had a property portfolio of I'm going to say about 12 or 13 properties. It was definitely valued in excess of $10 million. And the experience that he had and why he came to me was he kind of felt just that he was living under a rock. He had to earn considerable income just to support the portfolio before he even put food on the table. 

 

[00:05:29] And from the outside, you would have picked this guy as uber successful. And if you described his balance sheet, you would go, 'Holy cow, that guy's rich'. But the truth of the matter is, there were a couple of properties out of the portfolio that had unbelievable land tax attached to them. 

  

[00:05:51] Another couple of properties that had just amazing rates, just because of where they were located close to a prominent beach. And some underperforming rentals. Just everything about the whole portfolio was just a bit neglected. 

 

[00:06:07] I think to some degree, people tend to feel a bit powerless. Once they buy a property, they're like, 'Okay, well, now I've just got to sit and wait, and hope and pray that that thing goes up and looks after me'. And so the trap that sometimes you can fall into is just neglect, and not really wanting to actually examine, 'What have I got and does it make sense?'

  

[00:06:09] I think this guy was a good example, because I really wanted him to understand that he had options. And what that was going to require was him just actually looking at those options.

Tyrone Shum:   

[00:06:50] For all intents and purposes, sake, we'll put a name to him. This is not his real name. But we'll use say, for example, maybe Ben. So we can refer to this person as Ben. And I'll talk from what I'm hearing from Ben's perspective, it sounds as though Ben was literally working extremely hard just to keep the property portfolio and try and service it rather than actually this portfolio, creating passive income for him to be able to live the life that he was anticipating. How long do you think it took Ben to actually build this portfolio up to get to where he is today?

Salena Kulkarni:   

[00:07:24] He started investing, I'm going to say 25 to 30 years ago. And he had some primo real estate. Like, enviable real estate in that portfolio that anyone would love to own. But it just surprised me, because some of those properties were bought 20 plus years ago for a song. Like, really disparate bargain[s]. But he was still crippled with the cost to run those properties. High maintenance, high rates, high land tax, really poorly structured. So there [were] a bunch of things working against him.

Tyrone Shum:   

[00:08:03] Gosh, and it kind of begs the question, is there really any option to continue on something like this? Because if you're in that kind of situation, just like how Ben is where you've got multi million dollars worth of property portfolio— is it really necessary, or is it really worthwhile spending 25 years to build that up, and then you're still sort of stuck in that position? Because all you're doing is really servicing it. And keeping it maintained. 

  

[00:08:29] It's almost like the rich person... I'm thinking of somebody who's quite wealthy, has a lot of cash coming in, like a movie Hollywood star. They bought beautiful properties, large mansions, but they're hardly there. And they're spending so much money paying for servants and maids to look after that property instead of them actually enjoying it. It sounds like a little bit like that.

Salena Kulkarni:   

[00:08:47] There's some fantastic celebrity stories of loss. People like Nicolas Cage and alike who blew their fortunes on expensive properties. I think the question is, why bother? If you can't make it after 25 years, why bother? 

  

[00:09:07] I think that the real reason that we go into property investing is because we want to use it as a vehicle to build capital. And I think if you go into it recognising that that's what it's for... And there are tweaks you can make along the way to improve cash flow. And it just so happened that Ben, in this case, just hadn't done a great job of watching the bottom line 'til he was well into his journey. He had a successful business, so this was kind of like a background interest. 

  

[00:09:39] I talk a lot about the three parts of the wealth creation journey, and we've done a podcast on that as well. When you're in the first part of your journey, you have to build capital. And there are definitely ways that you can build capital that don't mean you put yourself under a rock like Ben did. You can aim to be as cash flow neutral as possible as you go, and that's certainly how I've done it, because I have probably not had the luxury of a super high income to support it. 

 

[00:10:11] But I think at some point, well before people actually think they can, they've got options. So number one— and this is the option that everyone understands— is you sell down assets to fund your lifestyle. 

 

[00:10:27] So one of the options that Ben had was sell up one property at a time, he had huge capital gains accumulated, and then just live off that money. And that, obviously, for most property investors is not palatable, because there's no legacy in that play. And there's certainly no guarantees around how long that money will last either.

Tyrone Shum:   

[00:10:52] On top of that, to also mention is that you lose your golden goose, because your golden goose is pretty much going to be the one say, for example, having more capital growth in the future. So if you sell that down at that point in time, you're missing out in future growth. 

 

[00:11:07] And that's the biggest lesson I've seen happening with my family and myself and my parents. Because you think at that point in time, that's the right decision. It may have been, because of personal circumstances, whatever it is. But then you look back in hindsight, 10 years later, 20 years later, and you go, 'Holy moly, if I had held those properties down, just holding it without even selling them, I would be three or four times more well off compared to what I am now'. So it's almost like your golden goose.

Salena Kulkarni:   

[00:11:35] I think this is a good time for me to bring up the idea that I think it's some old wisdom to say that you should buy and never sell. I think that was the old school way of approaching property investing. And there's still some people out there who say the same, like, 'Buy, buy, buy and never sell and hold it forever, and you'll be rich'. 

 

[00:11:52] But I think the truth of the matter is that in our society the way it is today, and the way it's complex, and the money is complex, and the borrowing is complex— I think to really be successful, you have to constantly be checking in and asking, 'Is this property delivering me what I need now and in the future?'

  

[00:12:15] And if you've got a property, which, let's say, for example, isn't giving you cash flow, or maybe is draining you of cash flow, it better perform in the future. And obviously, the thing is, there's no guarantees. But you can look at a piece of real estate. And if you do your homework, you can actually probably work out with a high probability whether that thing is likely to do well over time. 

  

[00:12:37] Is it going to be sought after? Is it in a good area? Are there infrastructure projects happening? Is there population growth? Is it perceived as a nice place to live? 

  

[00:12:50] I think the days of land banking, to some degree, which is what Ben had done— it's too hard now. Real estate is too expensive, and you cannot afford to put a foot wrong. But in the unfortunate likelihood that you buy something that maybe isn't a fit for you, my suggestion would be just to keep monitoring. 

  

[00:13:11] Sometimes you've got to pull up stumps and say, 'I just can't. The life balance, impact of holding a property just isn't right'. Or you have to sometimes look at a property and say, 'Well, maybe I made a mistake with this one'. And measuring opportunity cost is super important. And not enough investors do that. 

  

[00:13:33] So the selling down to fund lifestyle that I'm talking about is probably more for the person who has optimised their property portfolio, and they're just trying to think of a way. 

Coming up after the break, we hear why you’ll need more than just a calculator to work out the best properties in your portfolio to sell or keep…

[00:14:02] It's not about running the numbers through a calculator and then saying, 'Well, that one's not performing. Let's ditch it'. 

How she lays it all out on the table to help people see the possibilities…

[00:18:18] I'm a huge believer, not so much in being prescriptive, but more explaining to people what their options are, and what the implications are. 

She maps out the roads that can lead you to making $100,000 in passive income.

[00:24:45] That's a really good question. And I think there's two answers to that. If you were trying to get to $100,000 in passive income, there's two ways to go about it. 

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

Tyrone Shum:
For the first six months Kulkarni worked with Ben, they did deep analysis on what was and wasn’t working, what made sense and what didn’t, and what he was personally and emotionally attached to when it came to his portfolio.

[00:14:02] It's not about running the numbers through a calculator and then saying, 'Well, that one's not performing. Let's ditch it'. It's really being very holistic about whether you should keep this. Is it still serving a purpose? Is it doing what it said it would do for you? Or will it do what it said it's gonna do for you?

Tyrone Shum:   

[00:14:22] Because ultimately, if you've got it in your portfolio, and it's there, maybe there are some opportunities to be able to improve on it. And that's probably where people have become... I guess we get caught up in day to day life that we forget that okay, property is not just necessarily always going to be [a] passive thing. You still need to actually review it regularly, and keep on top of it, because things can change. 

  

[00:14:45] I guess that's where you've got to have a good team around you to be able to help you monitor that because ultimately, it's like just buying stuff every day and then just chucking it into a wardrobe without looking at it. And you come out at the end of say, five or six years, and go, 'Hold on, where did I get all that stuff from?'

Salena Kulkarni:   

[00:15:02] That's right. Flares aren't in anymore!

Tyrone Shum:   

[00:15:07] Exactly. That's the thing. That strategy, where you buy and hold and hold forever, is an old adage strategy. And we are, in this podcast, challenging that. Because I've also been raised to believe that as well. That's what my parents did. That's what my previous friends and family have all said to me as well, too. 

 

[00:15:27] But now that I've learnt and seen that there's alternative ways and other options, and so forth, you go, 'Man, I could basically take a step forward in a much faster time and achieve the goals I'm looking for, rather than have to buy 10 [to] 20 properties, I could do it in much less time with less properties'. 

  

[00:15:45] And less headaches as well, because I just don't like maintenance, as you probably realised! I don't want to have too much on my plate, I'm quite minimalistic. But at the same time, I must leverage up as much as I can.

Salena Kulkarni:   

[00:15:59] For Ben, he could see that one of his options was to sell down and fund lifestyle. But he pretty much put a line through that, because that didn't sit well with him, as you pointed out.

[00:16:12] The second option that he had was [to] keep working in some capacity to just bridge the gap. So have your property portfolio that maybe spits out a little bit of income, and then just work to bridge the gap. And then hopefully, over time, that gap gets smaller and smaller. So that's certainly an option that most people would understand. 

  

[00:16:35] And then the third option, which is where I feel that maybe I'm challenging people on their beliefs around wealth building is— the third option that I saw is that you could divert a little bit of capital that you have into alternative opportunities that deliver really strong passive income. 

  

[00:16:57] It's not to say that you couldn't go and put your money into commercial and get a slightly better yield. But I see that as all kind of permutations of optimise your property portfolio. But I definitely feel that people are taught to focus on capital, not income. And so I really think that you could definitely take those traditional pathways, which is sell down, or just keep working 'til the gap is bridged. But I like the idea of that outside the box thinking. You and I are big believers in alternative [strategies]. I just want people to understand that there are other ways.

Tyrone Shum:   

[00:17:37] It's really good that you mentioned that. I'm also wondering like, say, for example, let's just take Ben, for example. And I'd be curious to see what the next thing he did to get out of where he is currently in. As you mentioned, he's spent 25 years building his property portfolio. He felt trapped because he was just spending a lot of his efforts and time and money to continue to service that particular portfolio firstly, before even [being] able to put money or food on the table.

  

[00:18:06] What has changed, or which angle did you steer him into, and what has been done differently now to be able to achieve what he wants?

Salena Kulkarni:   

[00:18:18] I'm a huge believer, not so much in being prescriptive, but more explaining to people what their options are, and what the implications are. So I think if you can show people, 'Well, here's where you'll be in five years if you take this course of action. And here's where you'll be in five years if you take that course of action'. Like, a super conservative, middle of the road, and slightly more aggressive, and then it's easy for them to choose. 

  

[00:18:46] So with Ben, we looked at the idea of selling down just to create a bit of breathing space. But in the end, once we did the analysis on each investment property separately, what you could actually see and what he could see was, he could see his dogs. Like, they were just really obvious. 

  

[00:18:46] And then he had to decide, because obviously, when you sell an asset that has huge capital gains in it, you've got a big capital gains tax bill. The back end of that. So there were all those sorts of considerations. But ultimately, he fixed up some of the tenancies. He cleaned up his loans, and ultimately ended up selling off three out of the 12 or so that he had. And went from, I think it was about -$175,000 back up to... I think it put him sort of around $80,000. 

  

[00:19:07] And then from there, there was an ability to start accumulating small bites of a number of alternative investments, and he's got a bit of a portfolio happening now. And his income has probably pushed up to... I'm trying to remember, because we were talking this week. I think it's $200,000 plus now. 

  

[00:20:09] It's a huge transformation. And it didn't happen overnight. In his mind, he was prepared to maybe put 10 to 15% of his net worth into alternative [strategies]. But it's the journey of trying to dissect, what is your risk appetite? What are you looking for? Why are you even investing? What do you want? What's the outcome? And so yeah, he's well on his way now to being where he wants to be.

Tyrone Shum:   

[00:20:39] Gosh, that's like a 360 degree turn around from -$175,000 to close to $200,000. That's a very, very good story, Salena. Most people just forget, I guess, ultimately, at the end of day, that if you build a portfolio, you've also got to consider the cashflow behind it too. Because, yes, you've still got tenants that will pay for it. But you can still also have to cover the mortgage and the debt that's remaining. 

 

[00:21:04] At what stage do most people— and this is sort of also a question for me that I'm wondering— at what stage of the level of debt would you be comfortable to continue to hold? Because, I mean, it'd be ideal if you could have unencumbered properties, and you pay down all the debt and you have a positive cash flow property portfolio, but that's not reality. Most investors I know still leverage and have mortgages, like, good debt, to be able to continue to fund and generate income from their property portfolios.

Salena Kulkarni:   

[00:21:34] Leverage is definitely a super powerful tool. And I'm not advocating that we hold assets unencumbered. Debt is what allows us to take a really small amount of capital and explode it over a big portfolio. 

  

[00:21:49] But what I do think is that there's artistry in building a successful portfolio. In terms of how long should you hold and all of that, I think that's a more complex, and probably a personalised response. But I do think there's a lot of well intentioned wealth people out there selling all the wisdom. 

  

[00:22:13] The truth of the matter is, if I were starting from scratch today, what I would be doing is buying the best assets that I possibly could, that were as close to cash neutral as possible. And I would be progressively building my portfolio until the banks told me, 'No'. And unfortunately, these days, that's much sooner than it used to be. 

 

[00:22:37] Unfortunately, people of my generation, Gen X's, we didn't realise at the time, because we came into the workplace at a pretty bleak time. And there was a lot of unemployment. But from an opportunity perspective, we've had a great opportunity to accumulate real estate if we wanted to.

  

[00:22:54] The people before us had even more opportunity. But I would say, anyone shouldn't be discouraged by those limitations, and they should just do the best they can to put their portfolio in place. 

 

[00:23:08] And then unfortunately— this is not the answer people want to hear— but you've just got to wait for time to do some heavy lifting. You've just got to wait for the ratio of value to loan to just get better and better and better and better. 

  

[00:23:21] And then, at some point, probably well before retirement age, if you've started early enough, you'll have all this equity. And then you can start asking the questions around, 'Well, how do I take a small piece of that and turn the dial towards better cash flow without having to risk my portfolio?' 

  

[00:23:42] So that's the sort of quality of question that I think someone who's really looking to do well as a property investor in today's market needs to be asking and thinking.

Tyrone Shum:   

[00:23:54] And it'd be interesting also to ask this question, as we kind of alluded to at the beginning. What are the options? We've talked about the three options that are possible based on a portfolio, like what Ben had. Maybe delving deeper, just touching on the third option, which is to look at alternative strategies. What would you have recommended or suggested to look into to try and generate some additional passive income?

  

[00:24:24] Actually, before we even jump into talking about the passive income side, let's maybe give an example to the listeners. How much of a portfolio would you need to be able to generate, say, maybe $100,000 a year in passive income after all expenses from a property portfolio? So that way I can put things in perspective.

Salena Kulkarni:   

[00:24:41] That's a really good question. And I think there's two answers to that. If you were trying to get to $100,000 in passive income, there's two ways to go about it. 

  

[00:24:50] If you need that money today— like, if you needed to be on a run rate of $100,000 today— then I think realistically in my world, and I know that you have access to more lucrative deals, but I would say to someone, you could break up $1 million capital into several buckets, and generate a net return somewhere in the vicinity of 10 to 13%, all day long without taking on any risks. Big risks, I should say. 

 

[00:25:23] The other answer to that question would be, if you have a timeline of, say, five years— it's just a maths problem, isn't it? It's like, I want to be at $100,000 in, say, five years. What does my starting capital need to be? And how much am I prepared to add as fuel for that five year block, to allow my returns to compound to get where I want to go?

 

[00:25:50] And it could be that you only have to start with $400,000. And then just add in $100,000 each year for five years and then voila, you've got your $100,000 income. Or maybe your outlook is 10 years, and you say, 'Well, in 10 years, I want to be at $100,000 in income, and I've only got $100,000. And if I add $50,000 to $100,000 every year, then by year 10 I've got my $100,000 income. 

  

[00:26:19] So it's not that it's rocket science from a maths perspective, it's more that there's an element at play of how much capital do you have? How much are you prepared to risk? How serious are you about getting there? Over what period of time? And then just marrying that up to deals that are a fit. But the game plan and the strategy pieces [are] really important.

Tyrone Shum:   

[00:26:45] I totally agree, the game plan is so, so important to be able to work out what it is. But I guess what I was trying to allude to was, let's say for example, in order to generate $100,000 from, say, property as an example, and knowing the returns on property in Australia, let's say it's averaging 5%, would we even...?

  

[00:27:10] 1%, let's say 1%. To generate 100,000. A capital base to be able to sustain that.

 

[00:27:23] How many people would you know who could go and buy $10 million worth of property to be able to generate that kind of income? I guess maybe it's a time thing. But, like, most people don't even have... I don't see or know that many people except a lot of property investors. But the average Joe Blow will not be able to go, 'Hey, I'm going to buy $10 million worth of property in the next 10 years'. It doesn't seem like it's a real thing.

Salena Kulkarni:   

[00:27:50] Here's the thing, and this is where we started. We hold up this idea that if we hit a certain net worth, that we will be financially free, because that portfolio will generate income for us. But the big challenge in the whole world right now is there's plenty of opportunities, or there's opportunities out there to build capital, there are very few that generate good income. And that's the dilemma. 

[00:28:17] So saying, 'Oh, I have a goal of getting to a net worth of $5 million', or 'I want a net worth of $10 million, or $20 million, or $30 million, or $50 million, or $100 million'. Without the context of what income stream will you derive from that, or how hard will that capital work for you, it's almost meaningless. 

 

[00:28:37] You hit the nail on the head. Would you rather strive for net worth of $10 million earning a 1% income stream, or have a net worth of $1 million earning at 10%? So there's no right or wrong. But it's kind of changing the lens around the question itself.

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