In this episode of Property Investory we will learn how she managed to replace her income with aggressive and non-traditional investment tactics, seeing returns of 18–24%. You’ll also have the opportunity to hear some of her most valued tips and tricks, which are sure to make you successful!
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(30:19): When you know that there's going to be money coming in whether you get out of bed or not, whether the market craps itself, obviously the last year has been a very scary time for a lot of people. But if you knew that even if the wheels came off the economy, even if it wasn't business as usual tomorrow and you still had money coming in and you didn't have to eat the cow, I just think that's such a freeing place to be.
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 continuing our discussion with property investing advisor and best selling author, Salena Kulkarni. With a passion for finding alternative strategies to invest and with two decades of experience helping others achieve financial freedom, Kulkarni shares some of her tips, tricks and alarming stories!
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Kulkarni had a moment of clarity after completing a development in Melbourne that saw her and her husband making a $500,000 profit, in a very short space of time.
(00:40): You might look at that on the surface and go, 'Wow, what a great win', but it was actually a really painful experience. The builder went bankrupt, just prior to completion which meant that I was flying down to Melbourne every week to try and push it along. It was a great outcome overall, but moreso, it taught me a lot about the importance of defining what success looks like, as an investor.
(01:07): I made the decision from that moment onwards, that I wasn't going to expose myself to that level of risk again. Since then, I've done a lot of small scale developments but with a significantly lower risk. You would understand that even within investing, there's such a spectrum of investments that require virtually no effort through to those where you're super active.
(01:37): I think the aha moment that came to me was in 2009. We had a really good portfolio at that point [and] it was a mix of commercial and residential property. I started to really use my accounting skills to project at what point we were going to be financially free. We had a high net worth and we'd already been investing for nearly a decade at that point. When I did the numbers, I realised that in order for us to replace our living expenses and have that freedom to step off, it was [going to be] be another 25 years.
(02:14): That's when I went, 'Oh, god. This whole fixation with net worth being the ultimate metric can't be right'. Around that same time we had just bought a commercial property here in Canberra and the banks had basically turned around to us and said, 'Look, no more. We're not going to give you any more money right now'. I had a choice at that point, to kind of hit a wall and then go, 'Well, we've done pretty well, let's just sit on what we've got and wait that 25 years', or ask the question, 'What else?'
(02:54): I think one of the skills that really good investors have is that capacity to be tenacious, to be determined and to ask the question, 'What else?' The aha was recognising that property is a long game. Yes, you can make chunk deals and I get that, but driving up my net worth wasn't going to get me any closer to my dreams around financial freedom. So I started to explore other opportunities, other markets, other ways of doing things. That's how I stumbled into the alternate space and that was the sliding door moment in terms of a new game for me.
Stuck in the rat Race
Although one would think that it’s a high net worth that enables you to reach financial freedom, Kulkarni has other ideas about what a high net worth can really mean for the rest of your future.
(04:00): I think it's all well and good to say you've got millions of dollars of net worth, but you have to work. I've worked with so many people who have staggering net worth, way more than me and they are in so much financial pain. They have to keep hustling, they have to keep working to support their lifestyle. Or, eat the cow, meaning sell down assets to get off the ferris wheel.
(04:27): So one thing that I would say I've really embraced is the idea that yes, you have to do the hard yards and you have to use traditional investments to build up your capital base. Property for me is definitely the best vehicle to do that, so there's no avoiding that. But I think what happens is people hang their hat on this idea that they have to [reach] a certain net worth to have it be game over for them. What I’m experiencing and what I'm doing right now is showing people, you don't actually need as much of a net worth as you think.
(05:09): Part one of the game is to build a capital base. Part two of the game, as far as I'm concerned, is how you take that capital and start to turn the dial and put a tiny percentage of your portfolio into alternate to ramp up the cash flow, so that instead of waiting 20–30 years to replace that income, you can do it in a really short space of time, like 3–5 years.
Once you've done that, part three of the game is how do you turn all of that income into annuities and a family bank and all of those things that people give lip service to around legacy? But how do you make that really concrete and real?
(05:51): Wow, I love that three step process. It's so simple and clear and I think a lot of people can easily follow that. That's why I think a lot of people follow what you've been doing. What I'm just curious about, is what you said in part two, which is to actually turn them into alternate sources to be able to generate more cash flow. How do you go about doing that? What kind of sources are we talking about?
Expand Your Cash Flow Through Alternate Strategies
(06:18): Back in 2009 when I hit that wall, I just started looking at what else was out there. I think the thing that probably had the [biggest] impact in my world, was looking for people who had the results that I wanted. I searched the globe, I didn't restrict myself to Australia and New Zealand. I thought, 'What are people doing in other parts of the world?' I found mentors and people in other markets and I got a chance to look over their shoulder and just see what they were doing.
(06:56): [I would say that] following the models that somebody else has already created, is definitely better than trying to do it yourself. I started to hear about opportunities, even here in Australia you hear about opportunities that don't come onto the market, that are off market, that are out of the reach of most people who are trawling the net looking for opportunities.
(07:24): I looked at the European and the US markets, but what I liked about the US market, particularly at that time from a mechanics point of view, [was] that [it was] very similar to what we have here. The strategies exist in Australia as they do over there and I think the Australian market is fantastic for building up capital. It's awesome. In fact, there's not many markets in the world that match it.
(07:58): But, for cash flow it's terrible. I mean, the typical cash flow, for properties held without any debt – so no encumbrances at all, is between 1–2.5%. If you own a million-dollar property, I [personally] think that's a pretty terrible return.
(08:17): It's crap.
(08:18): Yeah. So by putting small amounts of money into some of these alternate strategies, where I could all day long, get 8–15% net returns, you can start to see that you don't need to put a whole lot of money into it in order to [multiply] your cash flow [by five]. That's why that market is so exciting [at this] point [in time]. The reason it works is because our market is all about capital, because it [has] become very efficient.
(08:48): There are so many people who are interested in property and you have to fight for deals here. So even though you would still say it's not as efficient as the share market, if you look at it on a global level, Australia has a very efficient property market. In the States, it's a very different matter. There's this space of real estate investing in the market, which is incredibly inefficient and because of that, it means that there are all these unconventional opportunities, which are just not available to the masses. It's really the playground of the ultra wealthy.
(09:23): Wow, it's fascinating to hear that and I think that's the reason why people have looked at alternative places, even for myself in the last couple of years or so. Capital growth has increased so much and it has become so expensive to purchase property, especially in Sydney and Melbourne. One place that they've talked about is moving into commercial space.
(09:41): Commercial has been a very, very big area that a lot of people talked about last year. It's probably slowed down a little bit due to covid unfortunately, you will have experienced that because you've got commercial properties in your portfolio as well. From there it's like, 'What next?' You could look at commercial [properties] and get great returns, but you still have [to] put a lot of capital in there. [Also], the banks only provide certain LVR's and you can [still] get capped out from there.
(10:07): I know I personally looked over in the states and when I was looking at some of the deals, even [just] hearing [about it] from a few people, I could pick up properties for $50,000–$60,000, even up to $100,000 recently. That would still include close to about a 15–20% return. I'm like, 'Wow, why am I not doing that?'
(10:25): I agree with everything you're saying and what I would add is that a lot of my clients have commercial property. Yes, it has been the flavour of the month for the last couple of years and I do like commercial property, but it's a game of snakes and ladders as well. Higher returns, but often associated higher risks and most of the people that I work with who own commercial property, at best, after they service their loans, they're making 3–4%.
(10:56): So we're still talking, a marginally better step up, but still not epic money. The deals that you're talking about in the States, which is buying property, is only one out of the eight strategies that I've started to focus on. So when I started over there, I thought that was what everybody meant by US real estate, that you just buy properties. But managing property from afar, tenants and toilets and all of that stuff, is a big headache. I got so many cuts and bruises along the way.
(11:31): What I believe now, out of all the strategies in the alternate space, is that owning direct property is my least favourite out of all of them. What's really exciting for me about the alternate opportunity in the states is that you can put small amounts of money into each deal. You can put as little as $5,000–$100,000, depending on the opportunity.
(11:56): You can do true diversification, you can diversify geographically, from a liquidity point, from an exit point of view. There's so many different layers to it. In Australia we talk about diversification and what it really means is, 'Well I bought a house in New South Wales, so let me go and buy one in Victoria now'. In the alternate space, because the dollars per deal are so small, it's really about diversification across strategy and all those other things that I talked about.
(12:25): So the idea of owning houses is great, but it's [at the] bottom of my pile now, in terms of the strategies. I want to control the deals, I don't necessarily want to own and be responsible for the tenants and maintenance and all that rubbish.
Controlling, not Owning
With a focus for alternate routes in property investing and the wisdom to know where you can mitigate risk, Kulkarni focuses on a number of strategies which each have variations within.
(13:02): There's the traditional one that you're talking about, which is just buying property. You go to a bank, you get leverage and you purchase or you just purchase in cash. There's probably four buckets of strategies which include direct ownership, lending deals where you become the bank, joint venture deals, meaning you partner with someone and you get paid a rate of interest.
(13:35): So it's a hybrid between a lending deal and a direct ownership deal and you get a share of the profit at the end of the development. Then the fourth bucket is syndications, where a group of you go in on one specific project. I'll add a fifth bucket, which is the main bucket that most of my guys like, which is the small private funds. This involves a bunch of people, but the fund manager has the capacity to get involved in multiple projects at the same time, could be business loans, multi unit complexes, all sorts of things.
(14:17): In those cases, especially for example, going to a syndication or fund manager, in Australia there are obviously slightly different rules and regulations surrounding those. How does that work overseas?
(14:31): From which sense?
(14:33): I guess in terms of regulation, like with funds here, they're quite highly regulated and you have to go through quite a lot of paperwork.
(14:43): Yeah, well I'm not setting up the funds. So it's not me that runs the funds and I don't get paid based on anything anyone invests in. So one of the attributes that I really think is important that you develop as an investor, is being very agnostic. Meaning that you remain unbiased by everybody else's opinion and what the market is saying and really being able to understand and look at deals on their own merits.
(15:10): So [you’re quite right], the funds over there are extremely well regulated. But a lot of these small private funds, they operate in a space that is too small for the big hedge funds. They're also way too big for your average mum and dad investor. They're very nimble, they can take on big deals, small deals and each fund has their own flavour of what they do.
(15:42): This comes back to your network. One thing that I prize is my network and a lot of the guys that I work with that run these funds, they won't work with you if you're just some unknown off the street. They're a very insular, private network and when they say, 'Look, there's a deal here', they'll fund it really quickly, they don't need anybody's money. So they're not the sort of people that will go out looking to the public to raise money. It's a very private network.
(16:13): The interesting thing is because we are described as aliens, a lot of those opportunities are like, if you were a local, they'd say, 'Are you a sophisticated investor? Have you got a net worth over this?' But because we're foreign, they don't care.
Coming up after the break, we hear more about the returns that Kulkarni sees and why that shouldn’t discourage you.
(17:25): I know it sounds like they must be super risky but in all seriousness, when you unpack the deals you will understand how the strategies work and you [will] also understand that these deals don't need a rising market or care whether there's economic turbulence.
We’ll also hear about what Kulkarni has been up to in the last 15 years since exiting the corporate world.
(22:03): For the last six or seven years, prior to starting the Freedom Warrior program, I was helping people find things in Australia and pointing them in the right direction. I'm not a buyer's agent, I just used to hand them on to people who were buyer's agents.
What formula she uses to calculate expected net worth and how effectively you are creating wealth...
(26:45): There's a formula that I kind of put my own spin on that I pulled out of that, which is, if you take your average household age and multiply it by your average gross household income and divide by 10, that should give you your expected net worth.
And that’s next. I’m Tyrone Shum and you’re listening to Property Investory.
Opening Yourself up to More Returns
The returns that Kulkarni sees would be much higher than average, as she takes a slightly more aggressive approach to investing.
(16:51): Typically, on the more traditional stuff, you can get 8–15% net returns. On some of the joint ventures and other lending opportunities, by the time you factor in your profit share, you can get returns of 18–24% because of that market inefficiency.
(17:25): I know it sounds like they must be super risky but in all seriousness, when you unpack the deals you will understand how the strategies work and you [will] also understand that these deals don't need a rising market or care whether there's economic turbulence. When you contrast that to the uncertainty in our market right now, you start to see that the relative risk is actually lower than what we experience in the Australian market.
(17:52): Yeah, I would have to agree with you because I'm already involved in those types of markets here. People [always] ask me how I'm able to get between 15–30% returns on these deals that I'm working on right now. They're secured and there's a lot of possibilities, there's just more to it. People just don't believe it. I can understand, because we've all been conditioned to believe that in this market, you expect maybe 3% return at most in Sydney markets.
(18:21): Up in Brisbane, you might be able to get a 7% net yield, and you go, 'Okay', that's what everyone expects. It's just [about] changing the mindset and then really understanding and unpacking the deal. I think that's where you've kind of gone further because it's a matter of opportunity costs. If you're going to invest your money and put it in something for the next 10 years, potentially in those 10 years, you could have actually compounded say a 15% return, instead of a 7% return.
(18:49): At the end of day, which is going to perform better? Well, I think the obvious answer would be the second one because it compounds at a greater rate. So it's really just about changing your mindset and working with different people to understand that. Once they understand that, it actually does work really, really well. Is that what you've kind of experienced as well from your side of things?
Not Relying on the Markets
(19:08): It's such a great point you raise and I'm all for healthy scepticism. My training has made me a very conservative person and yet, people are so suspicious and sceptical about these opportunities. What's it called when someone trolls you? I've had people definitely troll me and say, 'Oh, this has got to be a scam', but I have zero involvement in the investments that the people around me make.
(19:45): My role is to support and give them access, but I don't get paid and I don't have any involvement. I love Australian property and it is awesome, as I said, for building capital. But I got tired of relying on a rising market to make money and it's hard work finding good deals in our market.
(20:06): So right now, my plan A is building cash flow through these alternate strategies, which by the way all exist here in Australia, they're just not plentiful. But finding consistent deals is not as easy as it sounds and my worldview is that the world is full of undervalued opportunities and that's all I'm doing. I'm tapping into those, there's no smoke and mirrors, they exist, it's just that they're not mainstream.
Kulkarni exited the corporate world 15 years ago, after working as a chartered accountant and being employed by a number of publicly listed multinational companies around the world.
(21:09): I don't even know if I'm employable to be frank. I say that to my husband, like if I ever had to go back to a job, I don't think anyone would give me a job [since I’ve been out of the game for so long].
Replacing Your job with Investment Returns
This big change was brought on by Kulkarni’s decision to not only be home to raise her children, but also to focus on the property side of things when they started to provide the best returns.
(21:30): I've done lots of things [in the 15 years since leaving my job], I was an avid share trader, I've tried lots of things. It was never the case that I set out to start a business in this, I just started to have people ask me, 'Well, how did you do that? Could you help me with this?' It just sort of evolved from there.
(22:03): For the last six or seven years, prior to starting the Freedom Warrior program, I was helping people find things in Australia and pointing them in the right direction. I'm not a buyer's agent, I just used to hand them on to people who were buyer's agents. I think of myself as a strategist because I have that problem solving ability, but it's really only in the last two years that I went, 'I don't actually want to work that hard'.
(22:34): I want to work with fewer betters. I want to work with people who get the concept of what I'm saying, which is that you don't have to wait till you're 65 to retire. You can get there in the next 18 months, two years if you do the right things and you embrace some of this alternate stuff. So my attitude is, 'I'm driving this bus and I'm going in this direction, if you want to join me on that journey, jump on the bus'. That's kind of where I'm at.
(23:09): Fantastic. That's what it sounds like, [that] you're genuinely there to help people from the heart and you've got a strong reason behind that because you've achieved it for yourself. You've built a portfolio, you haven't had to work for the last 15 years. There's already proof there that you're genuinely here to help. I know a lot of successful property investors who are in the market doing exactly the same thing and they're really, really passionate and wanting to be part of that.
(23:36): Once you've reached that point, where you've got enough success it's about whether or not you just want to continue to enjoy your life, or you go out and leave a legacy and help others. I can see that's where you're going down at this point in time. So it's great.
(23:48): Yeah, I think I help on two ends of the spectrum. I help business owners who are wanting to build that exit ramp from their business and they're worried about whether or not they'll sell or not. Then at the other end, I love working with teenagers. So I've done a lot of work in the teenage market, just helping them understand the basics of stewardship, investing, looking after money and understanding that you can be the driver of your own financial success. It doesn't matter what you earn and I never had a high income I should add, ever.
Spend Less Than You Earn and Invest!
Even after spending a small fortune on every property course and book that was out there at the time, Kulkarni still says the single biggest driver of her success was the mentors and masterminds that she engaged with.
(25:24): There's probably been a number of people along the way, but they weren't famous. They're not like celebrities or anything like that, they're just regular Joe's who happen to have a great capacity to create wealth. It's effortless for them and there's no charge around it, they're not stressed about it and they're not money hungry. I think alignment on the values front is really important. So I'm actually relatively frugal, so I found that a lot of the people that I took on as mentors were also relatively frugal.
(26:03): The purpose of money is not necessarily the fancy homes and the big houses and all of that. It's really that capacity to influence that matters the most. So mentors, many and varied, from the wealth space. I've also had a long love affair with all things yogic. I've had some phenomenal mentors in getting your headspace right.
By putting her own spin on some teachings from a classic property investing book, Kulkarni is able to remember the basics, whilst also tweaking it to best suit her own style of investing.
(26:45): It's a very old style book, but it's one that you've probably read, which is the Millionaire Next Door. It's old, it's like 25 years old or something like that. But I think the principles in that book still stand true today and there's some great things in there. There's a formula that I kind of put my own spin on that I pulled out of that, which is, if you take your average household age and multiply it by your average gross household income and divide by 10, that should give you your expected net worth.
(27:30): Now, because of the way that the property market and affordability has changed, I have actually changed the formula a little bit and I say, your average household age multiplied by your gross income, divided by five, that's my take on that. But that should give you your expected net worth. Now, if you're above or below that, that gives you a barometer as to how effectively you are creating wealth. So I love that book. I just think it's got lots of great concepts and is just a reminder that there's no magic formula, it's just, spend less than you earn and invest.
Having a Confident Mindset
She admits to feelings of the imposter syndrome plaguing her from time to time, but finally feels – as a whole – comfortable in her own shoes.
(28:19): I think the biggest part of the journey for me has been the head game. Getting your head in the right space and being clear about what matters. I think I've wasted a lot of time going down a lot of rabbit holes because I wasn't sure and I didn't back myself. It's a little bit like the experience of seeing things on Facebook and Instagram. It just looks like everybody else has the perfect world and the perfect life and it's probably as I've gotten crankier and older that I say, I just have to back myself a bit more.
So what plans has she got for the future?
(29:28): Lots of things. Well, one thing that's kind of on the radar in terms of goals for the next 10 years is a move to somewhere coastal. My husband and I both love places like Newcastle and he's a real beach goer. So something like that is one thing that I'm excited about. But if we're talking [about] wealth and property, I love the idea that I've got a plan A, B, and C.
(29:55): Plan A is to continue to build cash flow through these alternate strategies. I'm not over exposing myself at all, I've still got a great portfolio of assets here in Australia, which is my plan B. Then my plan C is obviously all the traditional things that I don't really believe in, but super and all that stuff.
(30:19): I can't even tell you. When you know that there's going to be money coming in whether you get out of bed or not, whether the market craps itself and obviously, the last year has been a very scary time for a lot of people. But if you knew that even if the wheels came off the economy, even if it wasn't business as usual tomorrow and you still had money coming in and you didn't have to eat the cow, I just think that's such a freeing place to be. I just wish that for everyone.
(30:53): I feel really sad, I spoke to a guy earlier this week who was 70, such a sweet guy. He's been running a business all his life, is barely making ends meet and is now at the point where even at age 70, he knows he can't step off. I have real empathy for people who feel that they've got a higher purpose, but just can't work out how to access that.
Opportunity Meets Preparation
(31:18): So, the last question I've got for you is, out of all your successes, you've built a great portfolio, you found alternative ways to do things and you've helped so many people around the world in Australia. How much of that success is due to intelligence, skill and hard work? How much of that is due to luck?
(32:18): I genuinely believe I'm a very lucky person. I have massive gratitude for the journey that I've been on and the people that I've met. But I think there's that definition, which I'll probably get wrong but, where opportunity meets preparation, the intersection of those two things is really the dictator of the results that you get. So I would say it's probably where those two circles meet.
Thank you to Salena Kulkarni, our guest on this episode of Property Investory.