You Don’t Know Who’s Swimming Naked Until The Tide Comes In

A couple of clients who attended our seminar regarding investing in Central London came to see me last week. They had been following my articles for a while and only recently decided to come to the seminar. We had a brief discussion there and we then arranged to meet up.

They were not new to property, in fact they had invested quite heavily into property and still retained a fair number. Stereotypically like many asians they were self employed and owned a convenience store, which they had been running for over two decades.

I have seen many different situations with property in different parts of the country but the figures they told me even shocked me. The loan to value of the properties they held was ridiculous.


They had three properties all in sunny Margate, one which had a loan of over £800,000 with a value of only £350,000. They had two other properties with the same ratio!


Like many who have been working hard running their own business, they wanted to venture into something else to provide a certain level of income. This would then serve to provide a passive income, which would provide a cushion for them into the future should business decline or serve as a retirement fund when they decide enough is enough.

About 8 years ago in 2004 during the pre credit crunch era, when the property market was increasing everywhere, they were introduced to properties in Margate, through an agent “who could get things done”. They had an angle: they would purchase old guest houses as the hotel market in Margate was in decline. These were large properties which would be converted to flats by getting planning permission. While the permission was in progress the properties would be used as a HMO, House of Multiple Occupation, basically meaning the rooms would be rented individually. This kind of set up provides a strong cash flow.

We sold a similar HMO freehold property to an investor, it was in Marylebone and was producing £63,000 p.a. on a purchase price of £700,000, a 9% yield. This property was sold for £1.15m just three and a half years later.

In Margate the yields would have been much higher than this, even if the planning was not granted the properties would have been generating a strong positive income, although the hassle factor would be higher. Even our client who purchased the HMO in Central London was complaining regarding the never ending minor repairs and the constant turn around in tenants. The difference was he had made £350,000 on a deposit of £100,000. Our guys in Margate have ended up with a hole in their pocket.


What is the main difference between the two examples? Simply the location. This is what made money for one investor and lost money for the other.


Our friends in Margate completed the works quickly after planning permission was granted, and then remortgaged to the hilt in order to extract money from the building to replicate the model again. Easy to do in a rising market.

The surveyors shall we say were very optimistic in their valuations and kept the wheels rolling. The same surveyor firm is now under investigation. This was during the days when you could choose which surveyor you wanted when doing the mortgage application.

In a nut shell it was like the emperor with no clothes, every one knew what was going on but nobody said anything. From top down even the lenders didn’t care as they were simply selling the debt on and so it wasn’t going to be their problem later on, if it all went pear shaped.

Buy using this strategy they managed to purchase 10 buildings in a short period of time.

This is all good when the market is rising, but there is a saying: you don’t know who’s swimming naked until the tide comes in!

When the market turned, values plummeted. Though there was one saving grace for our Margate investors, cash flow. Because the interest rates were low they had income coming in from most of the properties as they were on base rate trackers. Using a good solicitor they managed to negotiate with the banks regarding handing back some of the properties and are currently left with four blocks, which have mortgages between two to three times the value of the properties.

It is not so simple that they can just give the keys back, as the lender will come after them for the difference in what they have lent and what they end up selling for, which is likely to be over £1m.

If they didn’t have equity in their homes they could simply bankrupt themselves, and start again but unfortunately they do, and these would be put at risk.

To say the least, this has been a steep learning curve for them and there are some lessons you cannot learn from books. They are still young enough to recover. It is worse when you see this kind of situation amongst pensioners, who have lost everything due to some bad decisions.

Luckily they haven’t lost their faith in property as an asset class, and they realise the value in investing in Central London. Despite the baggage of toxic debt acting as an anchor and weighing them down, their enthusiasm is there to make money in the Central london market. One reason is to make enough money to climb out of the hole they are in. In these situations the worst thing you can do is put your head in the sand.

I too have come to this conclusion after making errors in investing in far off places, a decision driven purely by yield. Or looking at regeneration plans and being told these areas were up and coming, unfortunately after several years they are still waiting to come up. Or the ‘discounts’ from off plan properties which have been offered on practically all the flats in the blocks and so no longer can be classed as a discount. All these discounts served to do was make the deposit disappear, so you could purchase by putting no money into the deal, hence opening the doors up for any penniless investor to invest.

Now if these guys had simply changed their chosen location to Central London this probably would have been a different story.

The Real Deal




  • Cash Purchaser Only
  • £125,000 for a 19 year lease studio
  • Lease extension costs £70,000
  • End Value £320,000
  • In prime location W2
  • Right to extend the lease will be passed onto the new buyer therefore no need to wait for 2 years
  • We have the right lawyer to handle this


Suresh Vagjiani

Managing Director

Sow & Reap

A Property Investment Company


!Tips of the Week

Buying a property is a package deal, like getting married! Don’t look at it from only one angle, if you concentrate only on yield you may find the capital value decreases.

Rather than purchasing in cash it may be tax efficient to take a mortgage, and also it will allow you to purchase multiple properties instead of only one.





Suresh Vagjiani
Suresh Vagjiani
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