Carlie: Hello there, it’s Carlie with the Expat Focus Podcast.
The property market – like so many sectors right now – has slowed down, as the world grapples with the COVID-19 pandemic. Tenants, landlords, homeowners – they’re all feeling the pressure. Governments are being looked to for bailout packages, while people in the process of buying or selling are now working to – in some cases – completely unknown timelines.
I arranged this interview with today’s guest – Ugo Arinzeh, founder of Onyx Property Consultants – just before things hit the fan, with the intention of sharing her insight into how the US property market works, and providing tips for first-time investors there. We’re still going to talk about that, along with Ugo’s work with clients where she’s based in the UK. But she’s also going to share her thoughts on what the current crisis means for property owners: the risks and the opportunities.
To start with, I’d like to touch on the topic that is on everyone’s minds at the moment – noting we’re recording this on Friday 20th March – the coronavirus pandemic, COVID-19, and what effect, or expected effect, it might have on property both in the USA and the UK?
Ugo: Well, Carlie, this is obviously so unprecedented. I don’t think anybody really knows. The fact that it is global in ways is perhaps a good thing, I think, because everybody is literally having to shut down. I know from my perspective, as an agent, it means that we can no longer really do sales listings or take on viewings or anything like that.
I’m not completely sure what it means in terms of people who are in the midstream of a transaction. I presume it can go through, but long-term, certainly, it’s going to have an adverse effect. But obviously, the real estate sector is just one of many industries that are going to be adversely affected, as people are just not able to move.
But the magnitude of it, no one really knows. But I would always come back to real estate as housing at the end of the day. So it is a fundamental need of humans. So, in that way, we are offering and providing that. So I think in ways it will rebound. It’s just a question of at what levels, but it’s a fundamental need, which is quite good. People need housing and people need to turn that over.
Carlie: You’re an investor and a landlord yourself, and I know many expats will be in the same position as you. What steps are you taking, or what are you looking to do, in the coming weeks to best protect yourself and your tenants at this really, really confusing, messy time?
Ugo: Well, I guess it’s taken on a case by case basis. In my situation … I don’t have a massive portfolio of properties. I just have a few. And it’s a question of: Can tenants continue to pay their rent? And if not, then that trickles up in my ability to pay my mortgage. And then that becomes a question of what kind of mortgage relief you can seek from the banks to do that.
As a property agent, I also manage properties on behalf of other landlords. I’ve already gotten an email from someone today in London, saying that one of the tenants says that he’s not going to be in a position to pay the rent. However, he owns a small comedy shop, and so, as a small business owner, he believes he will be eligible for the government’s relief, and therefore with that he intends to pay his rent.
But I think we’re all going to have to exercise extreme patience and understanding. But the knock-on effect, obviously, for a renter not paying their rent, is my ability as a landlord to not pay my mortgage. And that becomes a question of what relief the banks will provide on that.
Carlie: You did spend over a decade with Bank of America Merrill Lynch, and were involved in structuring and negotiating real estate transactions. What were your observations during the last downturn in the USA with property?
Ugo: Well, I think my biggest observation was there was a reason why we should loan at 75% loan to value. And yet, at the height of the credit, or just prior to it toppling, lenders were lending 100% loan to value. And they were getting seniors, who had in essence paid off their mortgages, to refinance, take money out, take equity, to take capital out … And so, they created a very precarious situation.
So my fundamental takeaway is that there’s a reason why there should be some equity in the deal. Because I think, when you don’t have any what I call ‘skin in the game’, you’re less likely to see a loan through. But if you’ve got 25%, 30%, 40% equity in a deal, you’ve got hopefully enough margin that should you lose your job, you’re able to make a mortgage payment, and it’s not reliant on an assumption that you will be able to just refinance – because your home is worth more – to then pay off the prior loan balance.
And that was the fundamental essence of the pyramid scheme that was being created. And then, taking all those loans and everything and securitising them and treating them as triple A rated, when the underlying loans were poorly rated.
So I think it was just creating a presumption that really was never built on the true essence of the economics of doing the deal. So, you can’t have things that are made up of junk bonds all of a sudden become triple A because you’ve stripped it into enough pieces. And that was the essence of what they were trying to do for a while.
Carlie: Do you think the lessons learned from that time will put the US housing market and property market in a better position to weather this COVID-19 storm?
Ugo: I don’t know. I think this is completely different. This is not like people got over leveraged. I think this is a question now … When you look at the essence of how an economy works … People are losing their jobs, so they’re not going to be able to pay, but it’s a health issue. It’s not like any of us can do anything.
I can’t go out and fix my situation tomorrow. I can’t go out and find another job. So I just feel like it’s just this completely different dynamic. Right? We can’t fly; we can’t travel. You’re in lockdown. We’re in self-imposed lockdowns. And so, I think we really just need to see.
What I do feel very hopeful about is that the government seemed very aggressive in terms of trying to pump money into the system, and helping people financially, and creating more … on payments, and things like that, and evictions. Because I just think we’re all in the same boat right now and there’s such a knock-on effect.
So, if I don’t make money … I’ve never been a person who has not been able to pay my bills, but how many months can I eat into savings to pay my bills and yet have nothing coming in and no prospect of it? And that’s what we’re all looking at. That’s a scenario we’re all looking at right now. So I don’t know that the last crisis really can help in this situation.
Personally, what I’m most hopeful about is that these governments seem to be aggressively putting money into a system to help people survive physically. Because we need that. Every single person’s going to need a way to buy groceries and pay, and to stay in their homes. And then hoping that China, and what we’re seeing in terms of their ability to start swinging out of this, is hopeful.
But again, China is more of a dictatorial society, where I think they can mandate things on a much stricter, more rigid basis than it seems like the West is willing to impose. You and I were just starting to talk about the difference in France versus the difference in England right now.
In England, it seems to continue to be optional, whereas in France, it sounds like – or at least in Paris, it’s getting a little bit more like this – it’s not optional. But if that is the case, and they are able to get ahead of this, then perhaps this is truly a two- to three-month crisis that we are all coming out of.
Carlie: Absolutely. And I really hope that in two to three months we’re going to see an upswing, everyone getting their lives back together and back to normal. With that in mind, Ugo, the reason why we scheduled this chat today for the Expat Focus Podcast, was to talk about the US property market, particularly for newcomers, for foreigners, for expats looking to enter it for the first time.
So, we are going to fast forward two or three months, to when the worst of this coronavirus is hopefully, crossing fingers, behind us, and maybe people are able to travel again and able to look at their next property moves again. For newcomers to the US market, can you paint a picture for me of how it typically works? What role do property agents and consultants play in the process of looking at property to buy?
Ugo: I think that the nice thing is that in America, if you are looking to buy a property, you do have the benefit of the market setup, such as there’s buying agents and selling agents. And so, you do get representation on the buy side, and both agents are – all agents are – licensed agents. And that’s really great.
And that’s a big difference from say how things are in London, which kind of blew my mind, which is why I do offer buying agent services. If you are moving to America, most likely you would ask for a referral, or if someone can put you in touch with a buying agent, who then represents you, and they will help you navigate that city or area you’re considering buying in, and show you the properties that are available.
And they have responsibility to you, so that they can advise you, and such that when you’re writing an offer, it’s a legally binding offer. So they will sit with you to write the terms of that offer. And so you get more support on the buying side than you do compared to the UK.
I don’t know how it is in France or other places, but in America, there is the ability to work with a buying agent. And I would advise everybody to do that, to find somebody that you think you can work well with and who understands your needs, who knows the market, who knows the areas.
And they can speak about things like commuting, schools, neighbourhoods – the things that you value as a potential buyer moving into, or considering, a community, or one community over another. And they can help you weigh those pros and cons and that type of thing.
Carlie: Obviously a buying agent is going to have that local knowledge and do a lot of that local research legwork for you. Is it a legal necessity to engage with an agent when you’re looking to buy, or is it possible in the USA to negotiate directly with the seller?
Ugo: You can negotiate directly with the seller. But why would you? I mean, in essence, if that’s not your core profession, why would you negotiate? And assuming the seller is going to have a selling agent, you’re now a layperson looking to negotiate with the seasoned professional. Why would you do that?
But yeah, you’re not bound to have to be represented by a buying agent. The way it’s set up in most states is that sellers pay a lot more in sales fees. So they typically pay between 5% and 6%, and that gets split between the buying agent and the selling agent. So while you have hired that buying agent, you don’t have to come out of pocket to pay them. They will earn their fee from— The seller is paying that fee to both agents.
Yeah. So you’d get the benefit of it, yet you’re not having to write a cheque to them. So why wouldn’t you use somebody with local knowledge and everything, and kind of tap into that and benefit from that?
Carlie: For investors, what have been America’s property hotspots over the past few years?
Ugo: The size of America is so massive, you can’t really speak for it. What I can say is there has been a trend to come back into the cities. Suburban sprawl came up and then people are still having to commute back into the city. People were finding that over the years they’d gotten hour, two-hour long commutes to come back into the city.
And yet, they don’t have an infrastructure halfway near of what Europe has, right? So people are driving into work in most cases. So they’re sitting in traffic for hours of time before they get to work and on the way home, and then trying to have a lifestyle with family.
Now what you’re seeing is a major resurgence back into the city. So I lived in Washington DC before moving to London, and you are just seeing it just grow exponentially. So things like waterfronts and areas that were completely underutilised, under considered, are having billions of dollars being poured into them.
So they’re creating live-work spaces, such that hopefully it might start addressing things like pollution and commuting and your ability to walk to work or commute to work and things like that.
And then culturally, people are getting really excited about the experience of living in cities, whether it’s their local coffee shops and just being able to walk to things, versus having to drive to everything out in the suburb. And when you think about your average young person … they’re going to very much want to live in the city. Yet now people in their thirties, forties and fifties, retirees, are coming back into the city.
People who are empty nesters are not staying out in the suburbs. They’re wanting that city experience. So I can’t really speak for cities or areas per se, but I can speak for, I think, the general trend, which has been that cities have definitely become a lot more appealing over the last 10 to 15 years.
Carlie: So when you engage an agent in the USA to look at some property, what’s the experience generally like?
Ugo: My experience has been that you actually go out with the agents. Typically, a good agent is going to get to know what you’re looking for, what your situation is … Obviously, they’ll have a sense of the local property market. And then part of it is also helping you level set.
So if you’ve got really grandiose views of how far your budget can go, one of the first things they’re going to have to do is really level set some of that and manage expectations. But absolutely you should be going out on viewings with them.
When I work with buyers here in London, that is very valuable, because people will respond almost viscerally, and if you’re not there real-time to experience that and get a sense of what really matters to someone, then you’re not really doing a great job for them.
Once you go in with somebody and they say, ‘Oh, I love that this room has lots of light,’ a good agent might say, ‘Well, is light really important to you?’ Or, ‘I noticed you spend a lot of time in the garage.’ Or something like that. ‘Is storage really important to you?’
And if somebody is doing that detective work, then hopefully the next time around, when they’re out with you, or they’re considering the next batch of homes for you to view, they’re considering those things and that feedback that they should’ve gotten when they went out with you the last time, or the last few times. So that would be a job of a good agent.
Carlie: You perform this role in London yourself. When you’re taking around foreign buyers, do you notice that there are aspects that expats are more likely to overlook when they’re looking at property in a new country?
Ugo: So, it depends. Sometimes, you might have somebody just looking for a second home, and obviously they might have different considerations. So, they might not be considering things like local schools and transport, right? Because for them, it’s not really about living and working in the city.
They’re going to come and use the space a handful of times a year. And so, for them, they might be more much more concerned about whether it’s a secure building, whether it has a port or a concierge … Is it a place that they can lock up and leave?
I find a lot of expats will be quite concerned about that, if they’re not utilising the home on a regular basis. So they might not like a converted terrace property. They might prefer more of a building with a concierge, because there’s more sense of security.
So that becomes a big deal for expats or potential foreign investors. Some investors I work with are looking as buy to let investors, so they’re looking from a rental perspective. Then it becomes, ‘What areas do we think might be really appreciating in the next few years? What areas have really strong demographics and underlying economics that are going to underpin rental demand?’ So we’re going to look at it from a very different perspective.
Some people are looking for great values, and so it’s going to be thinking about those properties that might’ve been on the market for some time, or you feel are very overvalued, or have sellers who might be more inclined to cut a great deal. So it depends what is driving somebody’s underlying reason to buy.
People might be moving over as a family. What I do think is that often people coming over as families aren’t going to jump into buying first. They are typically going to rent first, get a sense of London. Perhaps they’re on a fixed visa, right? So, you’re not going to go buy a family house if your is visa is only for two years.
But perhaps you might love it so much and decide actually this is a place you want to raise your family or be for the next five to 10 years. And then you might start considering buying, because now it’s going to be a place where you’re looking to really put down roots.
And then, in that situation, they might be a little bit more familiar, because they would have been renting for a couple of years. But then, they might want to completely switch area. So, where they would have rented comfortably isn’t the same considerations where they’re now looking to buy.
So they might say, ‘We were happy to rent in zone one or two. But, you know, perhaps from an affordability perspective, we might now need to go into zone three, or a little further out, just to get more for the money.’
Carlie: Are there any US property market works to be aware of? One of our previous guests, Mia, an Australian expat in LA, mentioned, for example, that there’s a bed bug infestation problem in some parts of the city. So, when she was looking for a rental, she had to be really careful of listings that had been, for example, really recently repainted, or something like that, because that could indicate a hidden problem.
Ugo: I think one of the biggest differences buying in America is that you can get 30-year fixed mortgages, which is, I think, great. So, from an affordability perspective, it really offers you a better ability. I don’t know how that might be affected by somebody being a foreign national buying into the American market, but one of the biggest differences is that in America you can get 30-year fixed mortgages. You can get mortgages for a lot longer terms.
As far as any other nuances … Again, every country’s going to be really different in terms of how that property market works. I think New York is an exception and an anomaly compared to every other place in the country. They have a dynamic called co-op boards.
A co-op board is … It’s like buying a condo, but it’s a board that actually has complete discretion over who buys. You can be as wealthy as you want, no issue on your ability to purchase that home, but if they don’t like the look of you, they can decline you, they can completely decline you.
So that one’s completely unique to New York, the ability for co-op boards to really be at their complete discretion as to who buys into that building. And it can be for whatever criteria that they choose. Somebody can have a dog, and they can be like, ‘Our criteria is no dogs over 50 pounds,’ and they put that in last month. So co-op board dynamic is really unique to New York.
But again, the US is a massive country. It’s the size of a continent, obviously. And if you are an agent in America, you’re licensed to that state for that reason. So if you’re licensed in Texas, you can’t go selling in Arkansas or Louisiana. You have to become licensed in that state for that exact reason. It’s because state by state, they have their own separate real estate laws that govern the buying and selling of property.
Carlie: That’s almost a reassuring thing, in that you’re going to engage someone who really knows their market so well, because that’s their jurisdiction. Right?
Ugo: Absolutely. And that’s the whole point. For example, as I said, I lived in DC before moving to London, and yet DC sits between Maryland and Virginia and they kind of call it the DMV, right? The borders are so fluid. So, you can easily go into DC to Maryland, into Virginia … Super easy.
You really want, as an agent, to be licensed at all three, because you might show somebody something and then they say, ‘Oh, actually, you know what? We think we want to go into Bethesda, which is in Maryland. But you know what? Actually, Arlington is super quaint in Virginia.’ So, if you’re not licensed, you’re not able to take those clients across those borders. So again, because each state will have their own real estate laws that are going to govern … Yeah. It’s just going to be very different.
Carlie: What would be your three pieces of advice to expats looking to invest in their first property in the States?
Ugo: Well, it’s absolutely to engage a buying agent – get somebody with local knowledge – and crunch your numbers. I think it’s the same anywhere. It’s like, ‘Why are you buying? What is your horizon for buying and timeline for buying?’
One of the biggest things is perhaps people who’re very big on buying off-plan, thinking they’re going to buy something and it’s going to be worth 50% more when it finally gets completed in a couple of years. Certainly, that’s not the case anymore, since we’ve had the financial crunch. So you need to be really careful in terms of time horizons and assumptions on rents.
So, if you say, ‘Oh, I’m buying this and I’m assuming I’m going to be able to get $3,000 a month off of it, because that’s where I think rental will be in six to 12 months,’ you better make sure that your numbers stack up based on $2,500 a month or $2,000 a month.
You have to really err on the side of being conservative when you’re making sure a deal stacks up. Obviously the maintenance costs of owning are quite significant. So, you want to make sure you’ve got enough reserve available, and you want to have that set aside.
I always advise my clients with that rental cashflow that you’re not just paying mortgage and pocketing the rest. You obviously have things like taxes to pay, and also things like maintenance. Because what you don’t want is a situation where the boiler or the roof or something goes wrong, and you don’t have the cashflow to pay for it, and you’re now relying on a credit card or something else or something catastrophic.
So yeah, you really just set it aside. I do think your ability to earn a yield is better in most places in America. London is really tough, and I think a lot of that is just because of stamp duty. We pay stamp duty on purchase.
In American, in most places – there’s really no place I know of, except maybe New York – you’re not typically paying a tax on purchase. So in London, when you add that in, it typically destroys your ability to really earn a good cash yielding investment. Most people buying into London property market are buying for long-term appreciation.
They’re willing to forego getting cashflow on a monthly basis, in lieu of the fact that London property prices have appreciated so much historically. Whereas in places in America cash flows very well.
You can buy a property where you can get yields of 8%, 10%, 12%, and that makes for a good cashflow property, such that you’ve got enough money coming in to pay the mortgage, set maintenance aside and still pocket a couple hundred, maybe a thousand, dollars a month.
That’s a very good investment opportunity. But the trade-off may be that property might not appreciate as much in 10 to 15 years. But what you bought it for was to get some extra cash flow off of it. Perhaps you’re looking at university towns or places where students are. Then again, you want to make sure you’re clear on what that means, as the kids are in school for nine months of the year. Does that cash flow work for you? Blah, blah, blah.
A lot of people are turning to Airbnb to really boost yields. Obviously then that’s got dynamics and criteria of its own. But we’ve seen, with everything coming back to COVID-19, Airbnb is decimated right now. Decimated, right? Because who is traveling? But it takes such a global catastrophic thing across the world, not just in one place, but across the world, where there’s no movement of people anymore.
So Airbnb, which we are seeing a lot of investors going into simply because they were trying to really produce those yields, increase those yields by offering it on a short term basis … They’re stuck, they’re completely stuck right now, and they’re not going to get a lot of relief, because I don’t think … If you’ve been doing short lets, and you might not have been doing it legally and stuff like, you might be really stuck.
Carlie: You might not be entitled for help, and then you’re looking for long-term tenants, and that pool of people with extra cash is quite small.
Ugo: Exactly. So it’s all turned upside down. And I just think in life … Obviously, we are all trying to make ends meet. The point is, in life, I think we all need to be living underneath our means.
I’ve done well by virtue of when I was a banker. I saved my money and then I bought property. I’m so bullish on property as an investment vehicle, in addition to stocks and bonds and everything else – it’s an alternative asset class.
One of the things I like most about it is that: what other investment vehicle will somebody loan you money to buy it? Nobody’s loaning you money to go buy stocks. Nobody’s loaning you money to go buy bonds. So, fundamentally, I see that as an advantage of buying properties, that somebody will loan you 60%-70% of the value of that property for you to acquire it and get the benefit of it.
But then again, when we see what the UK government’s been doing in terms of hitting landlords and just scraping all the benefit and taxes and everything else, I say, ‘Why are you doing that when people are literally just trying to come up with vehicles to really manage their life retirement?’
And if I didn’t have the properties I have today … To be strictly reliant on my 41k when I was a banker … Yeah, I did well, but I’m glad that I have properties that have cashflow for me and offer me an alternative post retirement, and that if I need to sell them, I’ve got significant capital now that I’ve built up equity. I’ve had them at decent interest rates.
I think that’s a dynamic that people can take advantage of right now, as the interest rates are very low. So again, while everybody’s panicking, perhaps this is a good opportunity if you can offer something, and say, ‘Oh, I’m going to be looking now to complete in a couple months.’ And hopefully the world gets back in order, and you’re going to be able to rent it, and now you’ve taken advantage of getting a really good deal.
There’s some risk involved with that, but I’ve got cash buyers who are kind of ready to do exactly that, and are willing to ride it a couple months, knowing that they’re getting deals at exceptionally good opportunity and good value.
Carlie: I guess even in the darkest times there’re always going to be some upsides. And it’s about finding that in the property market over the coming months and being ready when things do uptick again.
Ugo: Absolutely. I tend to be optimistic in all things. As a society, as a humanity, we’re going to get through this, we’re going to come out of it. And I think what you should be doing is probably saving your pennies, being strategic, and having your finger ready to push the button, when you feel comfortable to do that.
But be educating yourself, reading up on return on equity yields, that type of thing. And I think the thing about real estate, because so many people get into it as an alternative vehicle, people think they know it and then just jump into it. ‘Oh, my grandmother bought a property…’ Blah blah, blah.
A lot of people become accidental landlords, yet if you’re just buying into stuff and haven’t really done the homework, you will get burned and it can be a very costly, expensive mistake. Which is another reason why, again, I say work with an agent who can advise you, and I offer my service in London.
Buyers have to pay me my fee, but I believe I negotiate thousands of pounds of savings on behalf of my clients, well in excess of what my fee is. But that’s not the only reason to work with someone like me. It’s because if someone is an expert in that thing, they can bring perspective. They can bring crunching the numbers in a way that you can’t do on your own, or give you leasehold versus freehold, or do you have enough reserve and so on.
Is your interest rate a variable rate? What happens if it jumps a hundred basis points? Do you know how that stacks up for your deal? If you’re making assumptions based on a finite set of criteria or static set of criteria right now, then how many months can you go and the property be vacant, or tenants not be able to pay?
Be clear on those things, because if you’re not, then that’s when it gets very costly. Real estate investment, when it’s good, is great. When it’s bad … I’ve had properties that have gone months not being rented for whatever reason. And if there’s a maintenance issue, you’ve got to go in there and fix it before you can rent it again. And so, that takes cashflow and everything else. So you just have to be willing and have the stomach to ride the ups and downs.
And yet, don’t moan when things are bad. And when there is cashflow coming in, you just take it and just spend it right. If you didn’t set it aside for the rainy days, then you haven’t really managed that property prudently, that investment prudently.
Carlie: That’s it for this episode. If you have any questions for Ugo or want to share your own property investment experience, head over to expatfcus.com. Follow the links to our forums or Facebook groups.
Be sure to check out our other interviews, which include an international property investment chat with Lief Simon, and Mark Sayers talking through your need-to-knows before buying property in France.
If you like what we do, please subscribe and share us. You can even suggest a topic for an upcoming episode of the Expat Focus Podcast, by dropping us a note on social media. I’ll catch you next time.