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New figures from LSL Property Services has found that rental yields fell in January but property prices kept on growing, making it a mixed month for landlords.

LSL found that yields on residential property fell by 0.5% to 4.75% in January. It says this is the lowest level since August 2008 and a big fall from when yields peaked at 5.1% in March 2009, at the point when house prices reached the bottom. By contrast, house prices are 3.3% higher in January than they were in December 2009.

This yield drop followed a period of more intense activity in the housing market as buy to let investors rushed to benefit from the stamp duty holiday, so the amount of rental properties on the market ballooned. But now the stamp duty break has ended it might be likely that rental properties become more popular amongst those who simply cannot afford to get on the property ladder now that stamp duty has returned to its previous levels.

Total returns for buy to let landlords in January, combining rental income and house price growth, were 16.7% on an annualised basis. This means a landlord would make a total return of £27,500 on a typical property this year.

David Brown, commercial director of LSL, says: “Landlords moved fast to add to their portfolios before the stamp duty holiday ended in December. Sacrificing a few pounds a month in rent to save themselves an average of £1,600 tax on each property bought was a very shrewd move as it would take years to recoup that saving through gradual rent hikes. Now the holiday is over, it’s crucial landlords don’t lose sight of rents. Total returns look very enticing at present as house price increases contribute a larger share of a landlord’s profit.

"But, landlords should look to balance their returns between a steady rental income and long term capital growth. Focusing on one at the expense of the other is a risky investment strategy. Over the long term, investment in buy to let must be underpinned by a strong yield.”

SOURCE: LSL, 15/02/10

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