// underwriting

The numbers: analysing a London rental property

Last reviewed October 30, 2026

Most bad rental purchases look fine on the listing sheet. They go wrong in the details: rent assumptions that are too optimistic, missing expenses, no allowance for vacancy or big repairs. Here's a simple, conservative framework you can apply to any London property.

The key measures

• Gross scheduled rent: total rent if every unit is rented all year at market rent.
• Effective gross income: gross rent minus a vacancy and credit-loss allowance.
• Operating expenses: everything it costs to run the property, excluding mortgage payments.
• Net operating income (NOI): effective gross income minus operating expenses.
• Cap rate: NOI ÷ purchase price. A quick way to compare properties regardless of financing.
• Cash flow: NOI minus mortgage payments (principal and interest).
• Cash-on-cash return: annual cash flow ÷ total cash invested (down payment + closing costs + initial repairs).

A worked example

The figures below are hypothetical, chosen to show the method, not to describe the current London market. Replace every line with real numbers for the property you're considering.

If this example property cost $650,000, the cap rate would be about 4.6% ($29,580 ÷ $650,000), and it would be roughly break-even on cash flow with this financing. That isn't necessarily a bad investment: the tenants are paying down the mortgage, and the owner may expect appreciation. But it's a long way from "cash cow", and a rate increase at renewal could push it negative. That's exactly the kind of insight the exercise is for.

Common mistakes

• Using the seller's "potential rent." Verify against actual leases and current comparable listings. Remember rent control on existing tenants.
• Forgetting vacancy and turnover. Even good properties have gaps, and student rentals have predictable seasonal turnover.
• No capital reserve. Roofs, furnaces and water heaters will need replacing, and in older London homes, sooner rather than later.
• Ignoring your own time. Self-managing has a cost, even if it isn't on the spreadsheet.
• Stress-testing only today's rate. Run the numbers at a higher renewal rate too.

Stress-test your assumptions

Once you have a base case, change one input at a time and see what happens: rent 10% lower, vacancy doubled, a renewal rate two points higher, a $15,000 furnace and roof bill in year three. If the property only works when everything goes right, it's a fragile investment. Properties that survive a few bad-case scenarios are the ones that let you sleep at night.

Rules of thumb (use with care)

Investors sometimes use quick screens like "rent should be at least 1% of price per month". In markets like London at today's prices, few properties meet such tests, and they ignore taxes and expenses entirely. Use them to discard obvious non-starters, never to decide.

Beyond cash flow

Total return on a rental comes from four sources: cash flow, mortgage principal paydown, appreciation, and tax effects. A property can be a reasonable investment with thin cash flow if the other three are strong, but only if you can comfortably carry it through vacancies, repairs and rate changes. Speak to an accountant about the tax side.