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Most landlords buy a rental property in London knowing roughly what rent they will collect. Fewer know their actual cash flow — the amount left over after every expense, every vacancy period, and every debt payment. Fewer still know their cap rate or their cash-on-cash return.
These numbers matter. A property that looks profitable based on rent alone can lose money once you account for maintenance, vacancy, management, insurance, taxes, and mortgage payments. And a property that looks expensive can outperform one with lower sticker price once you run the numbers correctly.
This guide walks through the four core cash flow calculations every London rental investor needs: gross rental income, net operating income (NOI), cap rate, and cash-on-cash return. It uses 2026 London market numbers throughout so you can apply the math directly to a real property.
The Four Numbers Every London Rental Investor Needs
Before you run the numbers, understand what each one tells you — and what it does not.
Gross Rental Income (GRI) is the total rent you collect in a year assuming the unit is occupied every month. It is the starting point, not the result.
Net Operating Income (NOI) is what remains after you subtract operating expenses from GRI. It does not include mortgage payments. NOI is the number that tells you how the property performs as a business — independent of how you financed it.
Cap Rate divides NOI by the property's purchase price. It is a property-level metric used to compare investment properties without the distortion of financing. A higher cap rate means more income relative to price.
Cash-on-Cash Return (CoC) divides your annual pre-tax cash flow (after the mortgage payment) by the cash you invested (your down payment and closing costs). It tells you how hard your actual dollars are working.
These four numbers give you a complete picture. A property with a strong cap rate can still produce negative cash flow if you finance it aggressively. A property with modest rent can still produce strong cash-on-cash return if the purchase price is low relative to income.
Step 1: Gross Rental Income
Start with what the market will actually pay. In London, 2026 rents vary by unit type, condition, and neighbourhood.
| Unit Type | Monthly Rent Range | Annual GRI |
|---|---|---|
| Bachelor / Studio | $1,200 – $1,450 | $14,400 – $17,400 |
| 1-Bedroom | $1,500 – $1,850 | $18,000 – $22,200 |
| 2-Bedroom | $1,900 – $2,250 | $22,800 – $27,000 |
| 3-Bedroom | $2,300 – $2,800 | $27,600 – $33,600 |
| 4-Bedroom (student house) | $2,800 – $3,400 | $33,600 – $40,800 |
These are 2026 ranges for a unit in average-to-good condition. University District and Old North rents sit at the top of the range for their unit type. East London near Fanshawe and South London typically land in the middle. New builds post-November 2018 — which are exempt from rent control under the RTA — can push above the top of the range on re-tenancy.
To verify where a specific property lands, check current listings on Kijiji and Rentals.ca filtered to London. The goal is a realistic rent estimate, not an optimistic one. Underestimating vacancy is the most common cash flow error.
Account for vacancy. Even in a tight London market with vacancy rates below 2%, assume at least 4–6% vacancy (roughly 2–3 weeks per year) in your calculation. A 5% vacancy rate reduces a $22,800 annual GRI by $1,140. That is your effective gross income.
For more on pricing your London unit correctly, see how much to charge for rent in London, Ontario.
Step 2: Operating Expenses and NOI
Operating expenses are everything it costs to run the property, excluding mortgage payments. Most London landlords underestimate these. A common rule of thumb is that operating expenses run 35–45% of gross rental income. London properties tend to fall in the lower end of that range for well-maintained, modern units; older housing stock in East London can push to 40–45%.
| Expense Category | Typical % of GRI | Notes |
|---|---|---|
| Property tax | 8–12% | London rates average ~1.2–1.5% of assessed value |
| Insurance | 3–5% | Rental property policy, not homeowner policy |
| Maintenance and repairs | 8–12% | Budget higher for older buildings |
| Vacancy allowance | 4–6% | Even in tight markets |
| Property management | 8–10% | If using a manager; 0% if self-managing |
| Utilities (if landlord-paid) | 5–10% | Varies by lease structure |
| City of London Rental Housing Licence | 0.5–1% | ~$275–$350/year per unit |
| Accounting / admin | 1–2% | Legal, bookkeeping, small repairs under threshold |
NOI Formula:
Gross Rental Income
– Vacancy Allowance
= Effective Gross Income
Effective Gross Income
– Operating Expenses
= Net Operating Income (NOI)
For a 2-bedroom unit at $2,100/month:
- Annual GRI: $25,200
- Vacancy (5%): – $1,260
- Effective Gross Income: $23,940
- Operating Expenses (38%): – $9,097
- NOI: $14,843
This NOI is before any mortgage payment. It is the number lenders and experienced investors use to evaluate a property on its own merits.
The City of London Rental Housing Licence is a hard expense that many new investors miss entirely. At $275–$350 per unit per year plus renewal costs, it is not large — but it is non-optional, and operating without it exposes you to fines and LTB complications.
Step 3: Cap Rate
The cap rate converts NOI into a percentage of the purchase price. It is the standard metric for comparing investment properties.
Cap Rate Formula:
Cap Rate = NOI ÷ Purchase Price × 100
For a $450,000 single-unit property generating $14,843 in NOI:
- Cap Rate = $14,843 ÷ $450,000 × 100 = 3.3%
For a $550,000 duplex with two 2BR units generating $28,000 in NOI:
- Cap Rate = $28,000 ÷ $550,000 × 100 = 5.1%
London residential cap rates in 2026 generally run between 4% and 6% for multi-family and between 2.5% and 4% for single-unit properties. If you see a cap rate calculation showing 8% on a residential property in London, the seller is likely using optimistic rent or understated expenses. Run the numbers yourself.
Cap rate has one important limitation: it ignores financing. Two investors buying the same property at the same price will have identical cap rates — even if one uses 20% down and the other uses 40% down. For that, you need cash-on-cash return.
Step 4: Cash-on-Cash Return
Cash-on-cash return measures how your invested dollars perform after paying the mortgage.
Cash-on-Cash Formula:
Annual Pre-Tax Cash Flow = NOI – Annual Mortgage Payments
Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested × 100
Using the 2BR single-unit example at $450,000:
- 20% down payment: $90,000
- Closing costs (land transfer, legal, home inspection): ~$10,000
- Total cash invested: ~$100,000
Mortgage calculation (assuming $360,000 mortgage, 5-year fixed at 5.2%, 25-year amortization):
- Monthly payment: ~$2,160
- Annual mortgage payments: ~$25,920
Annual Cash Flow:
- NOI: $14,843
- Annual mortgage payments: – $25,920
- Annual cash flow: – $11,077
At current London prices and interest rates, most single-unit residential properties run negative cash flow in the short term when financed at 80% LTV. This is not unusual — and it does not make the investment wrong. Many London investors accept negative cash flow on single units because they are banking on appreciation and mortgage paydown, not monthly income.
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For positive cash flow at current rates, you typically need either:
- A larger down payment (40–50%)
- A multi-family property where multiple rent streams improve the income-to-price ratio
- A post-November 2018 unit where rent control exemption allows above-guideline rent increases on turnover
For a deeper look at multi-family analysis, see buying a duplex or triplex in London, Ontario.
Worked Example: London Duplex
Two 2BR units, older building in Old East Village, purchase price $575,000.
Income:
- Unit 1: $2,050/month
- Unit 2: $2,050/month
- Annual GRI: $49,200
- Vacancy (5%): – $2,460
- Effective Gross Income: $46,740
Expenses (42% of GRI — older building):
- Operating expenses: – $20,664
NOI: $26,076 Cap Rate: 4.5% ($26,076 ÷ $575,000)
Mortgage (25% down = $143,750; loan $431,250 at 5.2% / 25-year am):
- Monthly payment: ~$2,590
- Annual mortgage payments: ~$31,080
Annual Cash Flow: – $5,004 (negative, but modest) Cash-on-Cash Return: – $5,004 ÷ ~$163,750 = – 3.1%
This property runs slightly negative. The investor earns their return through appreciation, mortgage paydown (roughly $8,600/year in principal in year one), and the rent increase potential over time. The cap rate of 4.5% is at the low end of acceptable for a London multi-family. A purchase at $525,000 on the same income would produce a cap rate of 4.97% and likely positive cash flow.
London-Specific Factors That Affect Your Numbers
Rent control cut-off. Units first occupied on or after November 15, 2018 are exempt from Ontario's rent increase guideline. On those units, you can raise rent to any amount on turnover. This matters for cash flow projections on new builds — your future income is not capped at 2–2.5% annual increases. See Ontario rent control exempt properties for the full rules.
Property management costs. If you include management in your expense calculation (8–10% of gross), your NOI and cap rate drop accordingly. Many investors run the numbers without management to compare properties, then run them again with management to see what they can actually afford to pay. See property management fees in Ontario for current London rates.
Property tax. London's residential property tax rate is approximately 1.2–1.5% of assessed value (MPAC). On a $450,000 property, expect $5,400–$6,750/year in tax. This is a real and significant expense that many back-of-napkin calculations skip.
Rental Housing Licence costs. Every rental unit in London requires a licence through the city's Rental Housing Licensing program. The first-year cost is $275–$350 per unit. Annual renewals are required. A duplex requires two licences. These costs are real operating expenses — include them in every London-specific cash flow model.
Student rental premiums and risks. Student houses near Western University command higher gross rents ($2,800–$3,400/month for a 4BR). But vacancy in the summer, higher turnover, and higher maintenance costs change the expense ratio significantly. Budget 45–50% operating expenses for a true student rental, not the standard 35–38%.
Common Mistakes in Rental Cash Flow Analysis
Using the asking rent, not the market rent. Sellers use above-market rents to inflate NOI. Pull comparable listings yourself before trusting any rent figure on a listing sheet.
Leaving out property management. If you plan to manage the property yourself, your time has value. An investor working 80 hours a year at their opportunity cost of $50/hour is losing $4,000 in effective income — which does not show up in the cash flow calculation but is real. See property manager versus self-managing Ontario for the full cost comparison.
Using 0% vacancy. Even in a sub-2% vacancy rate market, vacancies happen. A 4–5% vacancy allowance is conservative and appropriate for any property.
Ignoring capital expenditures. The standard operating expense calculation does not include capital expenditures — roof replacement, furnace, windows, appliances. Budget an additional 5–10% of GRI annually as a capital reserve, separate from your operating expense calculation.
Confusing cap rate with cash-on-cash return. A property with a 5.5% cap rate can still produce negative cash flow if leveraged heavily at current interest rates. Run both calculations on every property.
Treating appreciation as income. Appreciation is not cash flow. You cannot use it to pay a mortgage or a repair bill. Base your purchase decision on the income the property produces today, not what you hope it will be worth in 10 years.
Skipping the London compliance costs. London-specific costs — Rental Housing Licence, Second Unit Registration for basement suites, property standards compliance — add $500–$1,500/year per unit in ongoing costs. These numbers are small individually but meaningful when you run a tight analysis.
Frequently Asked Questions
What is a good cap rate for a London rental property? For London residential, 4.5–6% is a reasonable range for multi-family. Single-unit residential properties typically run 2.5–4% given London's price-to-rent ratio. Cap rates above 7% in a residential context usually mean either inflated rent estimates or understated expenses.
Does a negative cash flow property make sense to buy? Sometimes. Many London investors hold single-unit properties that run slightly negative cash flow at 80% LTV. The investment case is appreciation + mortgage paydown + rent increases over time. Whether that is the right strategy depends on your time horizon, tax situation, and risk tolerance — not a blanket rule.
How do I estimate maintenance costs for a London property? For a well-maintained property under 20 years old, budget 8–10% of GRI. For older housing stock (pre-1990), budget 10–14%. If the property has a known deferred item — aging roof, old furnace, original windows — add the estimated replacement cost divided over 5 years to your annual expense calculation.
What is a reasonable vacancy rate to use for London? London's overall rental vacancy rate is below 2%, but individual properties still experience vacancies on turnover. Use 4–5% in your model for a stable property with a track record. Use 6–8% for a new acquisition or a student rental with higher turnover.
How does rent control affect my cash flow projection? If the unit was first occupied before November 15, 2018, your annual rent increase is capped at the provincial guideline (2.5% in 2026). This limits how fast your income can grow. Units first occupied on or after that date are exempt — your income on turnover is limited only by the market. This distinction matters significantly for long-term projections.
Should I include HST in my cash flow model? Long-term residential rent is HST-exempt in Ontario. You do not collect or remit HST on residential rent. But you also cannot claim input tax credits to recover the HST you pay on property expenses. See our full guide on HST and residential rental properties in Ontario.
How do professional management fees change the numbers? A 10% management fee on a $25,200 annual GRI costs $2,520/year. That drops your NOI by $2,520 and your cash flow by the same amount. On a property running marginally positive cash flow, management fees can push it slightly negative. This is the correct calculation — and why the break-even comparison between self-managing and professional management is rarely as clear-cut as it looks. For the full comparison, see property manager versus self-managing in Ontario.
What is the difference between cash flow and profit? Cash flow is money in minus money out — a cash concept. Profit is an accounting concept that includes non-cash items like depreciation (Capital Cost Allowance). A property can produce positive accounting income but negative cash flow (if principal payments are high), or negative accounting income but positive cash flow (if CCA deductions are large). For tax filing purposes, the accounting figure matters; for day-to-day management, cash flow is the operating reality.
Knowing your numbers before you close is the standard that separates landlords who build sustainable portfolios from landlords who scramble to cover costs every month. The calculations in this guide take 30 minutes per property. That is a reasonable investment before committing several hundred thousand dollars.
If you own a London rental property and want to know whether professional management is financially worth it for your specific situation, Prospera Properties works with landlords from one unit to multi-family portfolios in London, St. Thomas, and Strathroy. Start with the freedom score calculator to see where you stand, or visit our pricing page for a clear breakdown of what management costs and what it typically saves.