It was November the 16th, 1995. I’ll never forget that day — a Thursday, 10 o’clock in the morning. I was sitting at my desk doing the normal things: writing a report, phoning around for comparable evidence, a little bit of admin, when Helen came over and said, “Peter, Geoffrey would like to see you in the conference room right now please.” There was nothing unusual in that. Geoffrey was my senior partner and we had often worked closely together on many cases. It all seemed very routine and normal. I knocked on the conference room door and went in, but I could instantly see that something wasn’t right. Geoffrey was sitting at the big mahogany table with his back to the window, and although he beckoned me to sit down he avoided eye contact, his eyes fixed on a white envelope on the table in front of him. I sat and waited, but for what seemed like a long time he said nothing, so eventually I said, “Geoffrey, what is it?” As he looked up I could see the anguish on his face as he said, “I’m sorry Peter, we’re going to have to let you go,” and with that he pushed the white envelope across the table. I realised with a start that it contained a cheque for my redundancy payment.
It was the nineteen nineties. I was a Chartered Surveyor working in the West End of London, dealing with commercial property, and the recession had bitten a few years before. The property market had been in a steady decline for some time, not just in commercial, but also residential. Negative equity — a phrase that barely anyone had needed before 1990 — was suddenly everywhere. People who’d bought at the peak of the late 1980s boom, stretched themselves to do it, and then watched interest rates climb to fifteen percent were stuck. The repossessions were coming through in steady waves. I was in my mid thirties. It was a fairly sobering introduction to what property markets actually do when conditions change.
I’m telling you this not to be dramatic, but because I think there’s value in having been a professional observer living through the market at that particular moment, rather than just reading about it afterward. When you’ve spent years looking at the gap between what people paid and what a property was actually worth in a falling market, certain things stay with you.
What stays with me most is this: the people who got into the worst trouble weren’t reckless or stupid. Most of them had made decisions that looked perfectly reasonable at the time they had made them, but turned out to be fragile when the market reversed. Too much leverage, thin cashflow, and no margin for error — none of it shows up when the market’s strong. But when the market reverses, it stops, and it all shows up at once. The investors who came through that period were the ones who’d kept their borrowing under control, owned properties that covered their costs, and weren’t depending on values going up to make their numbers work. They weren’t especially clever, they were just using sound principles.
Fast forward to 2008, and I was watching something like it happen again, though in a different way. The trigger wasn’t interest rates this time — it was credit. Lehman Brothers collapsed in September and the mortgage market froze almost overnight. Lenders who’d been offering to lend at six and seven times income simply pulled their products. You couldn’t get money even if the deal was fundamentally good. Prices fell, transaction volumes collapsed, and investors who’d been doing well in a rising market started to panic. Stories began to emerge of lenders pulling mortgage offers on the day of completion — yes, they can do that — leaving buyers to face the consequences including legal action from sellers.
And yes, I panicked as well. This was my first taste of a recession as an investor, and it feels very different when it affects you directly, rather than being just a story in the news. For several months I carried a feeling of dread as I read of some lenders calling in loans. But over time, I realised that most mortgage lenders were living with the status quo and not rocking the boat, and that owning properties that were producing rent and positive cashflow meant their interest payments weren’t at threat. And at that time, that was what they were mainly interested in. When your investments generate income regardless of what the valuation column on your spreadsheet says on any given day, a market correction is very uncomfortable — but it isn’t a full-blown crisis. And that’s the point. If your entire investment case depends on the property going up in value, you’re not really an investor. You’re a speculator who’s getting good results while the market moves in your desired direction. The problem is that you generally don’t find that out until the market stops moving with you.
The lesson from 2008 was the same as from the early nineties, just presented differently. Cashflow is crucial. Borrowing sensibly is important, and not stretching to the point where one bad month, or one difficult tenant, or one void period puts the whole thing at risk. These aren’t complicated ideas, but they can be the ones that get quietly forgotten in the excitement of a rising market, when it feels like you can afford to be more ambitious with the numbers because everything’s going up anyway.
Since 2008, there have been other significant market changes worth understanding — not recessions exactly, but changes that caught a lot of investors off guard. The 2016 changes to mortgage interest tax relief, phased in over several years, fundamentally altered the cashflow calculation for landlords who hadn’t planned for it. An investor who bought in their own name and who was running on thin margins before Section 24 came in would have felt it. Some investors are still feeling it. The Renters’ Rights Act, when it comes into full force, will change the operational picture again in ways that landlords running lean portfolios will need to think through carefully. And no doubt it will also increase costs. The point is that the market keeps changing, but the need to actually understand what you’re investing in, and what the numbers look like under different scenarios, doesn’t.
What I’ve found across four decades of being in property is that the fundamentals are remarkably consistent. Markets go up and down. Lending criteria change and tax treatment changes. What this often means is that property strategies that worked well in one cycle need adjusting for the next. All of that is real and worth paying attention to. But underneath it, the same questions apply: does this property generate enough rent to cover its costs and give me a reasonable return? Am I borrowing sensibly? Do I understand what I’m buying? If the answers are yes, you can generally weather whatever the market decides to do next.
A lot of advice you’ll receive nowadays about property investing hasn’t been tested by a proper downturn. It’s been produced during a period of rising prices and relatively cheap credit, and it holds together fine as long as those conditions hold. When they do change — and they always change eventually — what holds up is the boring, safe approach. Cashflow, margins, not overpaying, not over-leveraging, and not building a plan that only works if everything goes right.
By the way, let me be clear — I’m not saying any of this to put you off. I’ve spent more than forty years in property, almost thirty of them investing for myself, and I’ve built a portfolio I’m genuinely pleased with. I wouldn’t have done that if I didn’t think it worked.
But I think it with four decades of context, including two significant market corrections and several smaller ones in between, and what that experience has given me is a healthy scepticism about optimistic assumptions, and a genuine appreciation for the basics.
The current market — higher mortgage rates than investors were used to a few years ago, a more complex regulatory environment, and genuine uncertainty about where rents and values are going in some areas — isn’t the easiest environment to operate in. But property is still do-able if you keep to the basics: know your numbers properly, borrow sensibly, don’t fall in love with a deal to the point where you ignore the maths, and have a plan that works under stressed conditions, not just optimistic ones.
If you’re coming to property investing for the first time, or returning to it after a gap, that’s the mindset worth starting with. Not the excitement of a rising market, but the discipline of someone who knows markets don’t always rise, and has built accordingly.
Here’s to successful property investing.
Peter Jones
Author, property investor and ex-Chartered Surveyor
PS By the way, if you’d like a deeper dive into property investing based on the real-life experience of an investor who has built a substantial multi-property portfolio, my popular e-book, The Successful Property Investor’s Strategy Workshop, explains how I built my own portfolio from scratch and the principles that can help you do the same.
thepropertyteacher.co.uk/the-successful-property-investors-strategy-workshop
