In the episode:
The appeal of alternative investments is predictable, sustainable cash flow, says Salena. It’s like an instant business. [01:26]
How does the risk compare to that of traditional investing? [03:12]
Is alternative investing an option available to everyone? [06:26]
These are what alternative investments look like… [08:46]
Is partnering easier than just borrowing from the bank? [12:10]
These are the options – make your choice. [13:29]
James asks a couple of daring questions. [15:47]
People typically go into business for the freedom and the income. And many hope, after tax and expenses, to have enough profit to put some of their money to work.
James and Selena Kulkarni have talked in previous episodes about what you can do with your surplus, and in this get-together they explore some less-known but more lucrative options than traditional investing.
The investment that’s like an instant business
The idea, as James has it from conversations with Salena, is to put some of your low-earning equity or cash into alternative investments.
If you can add continually to that, you could earn something like 12 percent per year interest, and start generating a positive cash flow independent of your business. Ultimately, should you decide one day not to work any more, or if you sell your business, that nest egg can actually fund your lifestyle and create a surplus.
Alternative investments are just investment options outside of mainstream. And they are deals and strategies structured in such a way as to deliver predictable, sustainable cash flow. It’s very different from the 45-year retirement plan where you save and hope to put away enough money for your twilight years.
What kind of risk are we looking at?
Most people, says James, foresee 25 to 30 years to pay off their mortgages. And with inflation and the like, they often wind up selling that house to get a smaller place and free up money to afford living.
In America there are roughly 150 million businesses, and only one percent of the owners make enough to retire and live within their means.
The last two years have seen tumultuous change in governments, in markets, in stocks, in technology, in culture. A lot of instability. It’s quite possible what we consider normal will not be there in the future.
James thinks the more that we can control, the better. So what’s the risk profile on alternative investing?
“Ultimately, when you buy a property, you’re speculating that the market will continue to rise. – Salena Kulkarni”
Salena would argue it’s less than with, say, traditional real estate investing. Ultimately, when you buy a property, what you’re doing is speculating that the market will continue to rise. So the enemy of a typical property investor is someone who enters the market when it moves sideways, or goes down.
The real gold aside from the epic cash flow in alternative is the fact that it doesn’t matter which way the market moves. If the market moves up, you make money. If the market moves down, you make money, if it goes sideways, you make money.
Alternative investing, however, is a very broad term. At one end of the spectrum are hair-raising deals like venture capital. At the other end you’ve got assets and strategies backed by real property. That’s the end Salena sticks with. It’s dull, but lucrative.
So who’s doing alternative investments?
And who’s participating in this, asks James? Is it something available to everyone, or to a smaller community? And Salena has talked about inefficient markets – do these investments come under that?
Alternative investments have always existed, says Salena. They’re in Australia, in the States, all over the world. The challenge is there is a whole industry which doesn’t profit or can’t profit from those styles of investment. So all of the literature and education and common wisdom doesn’t support this style of investing.
And as James has pointed out, the reason the returns are so lucrative is because it’s in a very inefficient space in the market. This has been the playground of higher net worth individuals, who are not keen to share that information with the world at large.
It seems to parallel the health industry, says James. There’s not much money in telling people to exercise, drink water and eat whole food. All the big bucks are in additives and supplements and treatments, so that’s where the attention goes.
These are the kind of investments we’re talking about
Can Salena give examples of alternative investment? Say he gives her half a million dollars. What would they do with it?
With any lump of capital like that, says Salena, you want to carve it into multiple buckets. First you’ve got small private funds, and that’s where many investors will come together with what she calls a dealmaker. This person basically puts the fund together, and they invest it into many assets.
It could be single-family housing, it could be multifamily, it could be commercial. But there’s a purpose and a mandate of the fund. It could be a lending. It could be a lending debt fund. It could be an equity fund. It could be all sorts of different permutations. But every fund will have its own purpose. And so you go into all the different funds on that basis.
Then second bucket is syndications. That’s where, again, separate investors come together with a dealmaker, and you’re purchasing one asset.
There’s different types of syndications. You can have residential townhouses, you could have apartment complexes, commercial. There’s all different ways.
It’s like sharing in an investment, says James.
Totally, says Salena, with an active plan.
The active plan part, James imagines, takes some intelligence and market knowledge, someone with experience or specialty in the market.
Salena agrees. Deal makers have a very narrowed, deep focus in one particular style of investment.
An expertise, says James, that the syndicate members are unlikely to achieve in a lifetime.
Correct, says Salena.
Then the third bucket is joint ventures. That’s where you partner with an experienced dealmaker with a track record, and you do deals together. An example would be sticking $20,000 into a lending deal with a partner. It’s a two-year loan where you get paid 10 percent per annum. But at the end of the deal, you’ll get a 10 percent profit share of the deal.
Overall, the return might be 15 to 19 percent overall, and there’s generally small deals where you partner. What’s great about that is you get to ride the coattails of someone who has a long track record and who knows the market. They deal with tenants and toilets; you don’t deal with anything. You just get paid your money.
Why not just borrow from the bank?
Why take partners, asks James? Why not just borrow the money from a bank at three percent?
It’s a great question, one Salena has asked all her trusted advisors, who are all independently wealthy and don’t need the money. The truth of the matter is, there’s more capital in the world looking for a home than there are good deals. But at some point, anyone with financial independence will tell you, sitting around and surfing or playing golf all day, every day, starts to wear a bit thin.
“Sitting around and surfing or playing golf all day, every day, starts to wear a bit thin. – Salena Kulkarni”
So investing for these guys becomes a game. What kind of deals, what kind of volume? But it’s less about the money for them and more about impact for others. Another million makes no difference to them. They want to be of service.
And how do you get to talk to these guys?
Salena has done the hard yards, she says, investing in those sorts of deals since 2009. She’s jetted all over the world, made multiple trips, and made her way into better and better networks.
Weighing the options
If you want to bypass the headache, she says, she can help. If you want to learn for yourself, she can help. She does feel that buying an asset and waiting for the drip of income to increase is a redundant way of investing. And the market being as volatile as James has pointed out, there’s no guarantee you’ll get the outcome you want.
On the other side of it, says James, is the chaos happening in the crypto Bitcoin blockchain space. He’s seen many peers focusing on that space, and his concern is that the rug will be pulled out from under.
He’s experienced it himself, 500 percent increases in capital in a matter of months, and his instinct fortunately was to fully expect it to disappear, and not to remortgage his home for equity.
So on the two extremes, there’s the slow, old, traditional way that is still risky. And then there’s the fast, hyper-risky route, with massive gains and equally massive losses.
A couple of daring questions
Closing out, there are two questions James considers daring, but he’ll ask them anyway.
Would Salena say that she’s independently wealthy?
She would. If she stopped working, she’d be more than fine.
Second, having had a peek at James’s financials, would she say he is in a good position to benefit from alternative investments?
Totally, says Salena.
She’s trying to bring people something like hope. She sees business owners slogging it out who, no matter how profitable they are, can’t seem to cut a break, unless maybe they sell their business.
But the people she wants to work with are looking for an insurance policy, or an exit, sometime in the next two to five years. That’s not a crazy timeline, she says. And when you understand these investments, you realize they’re not risky in contrast to even traditional property or traditional shares. But her feeling is that many business owners feel like they only have two polar extremes and nothing in between.
That’s it, says James. The big takeaway he’s had is, if he puts the money he’s collected to better work, then he can accelerate the amount of passive income that’s coming his way.
That’s income coming from investments he doesn’t see or touch, that manage well, that have a low risk, that are going to more than cover his living costs, aside from whatever happens to his business, to live comfortably for the rest of his life.
Salena’s analysis of James is of a fairly conservative investor, at a stage in his life where he doesn’t want to take big risks. So the journey is to identify the minimum amount of viable capital to help him get a meaningful result in the shortest possible space of time without taking on any risk.
“You’ve got to have multiple safety nets. – Salena Kulkarni”
And she knows she needn’t worry about him getting drunk on yields. Some people throw everything in, and her view is you have to have multiple safety nets.
So alternative investing could be the key to building a passive income stream in a relatively moderate space of time. Then you might have property behind that, then superannuation and maybe something else. But for most entrepreneurs, Plan A is the business, which is great. But it’s great to have a choice. That’s really what it’s about.
Join the community of thriving business owners inside JamesSchramko membership