Yields on residential property fell to 4.75 percent in January as rents slipped while property prices powered ahead. This is the lowest level since August 2008, according to the latest Buy to Let Index from LSL Property Services, which operates a network of UK lettings agents.

According to its figures, yields peaked at 5.1 percent in March 2009 when house prices reached the bottom.

Rents fell 0.5percent in January and are now 2 percent lower than in September 2009 following the fourth month of consecutive declines. Declines were broadly spread by region. By contrast, house prices are 3.3 percent higher.

This followed a period of more intense activity in the housing market as investors rushed to benefit from the stamp duty holiday. The additional supply of rental housing pushed rents lower.

Total returns in January (combining rental income and house price growth) were 16.7 percent on an annualised basis. This means a landlord would make a total return of £27,500 on a typical property this year.

Almost £20,000 of this return would be in the form of house price inflation.

David Brown, commercial director of LSL Property Services, said: “Landlords moved fast to add to their portfolios before the stamp duty holiday ended in December. This has meant higher rental supply at a time of year when tenant demand is traditionally quieter.

Landlords have had to cut rents in order to avoid even costlier void periods.

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.”

Landlords celebrated the New Year with lower tenant arrears however. Collective tenant arrears had fallen £34.1m to £247m by the end of January compared to December. Tenants are usually slower with their December rent, holding back to smooth their Christmas cash flow. Serious arrears (over three months) held steady at £24m.

According to LSJ there have been four distinct phases in the buy to let market over the last two years, each lasting roughly six months. The company stresses the reasons behind a rise or fall in the investment yield are crucial to minimising risk and maximising return.

Phase 1 - Danger Signs: At the beginning of 2008, yields shot up rapidly as rental inflation accelerated but house prices began to drop.

Phase 2 - Worst of Both Worlds: From summer 2008 rents fell and prices were in freefall as the UK plunged into recession. With prices falling so fast, yields kept climbing. This is the nightmare scenario for landlords. A high and rising yield is only a good thing if it is a result of rents rising more quickly than house prices.

Phase 3 - Ideal Time to Invest: The stability of early 2009 provided the perfect buying opportunity, locking into rock bottom house prices with rents beginning to climb.

What’s more, there was no stamp duty to pay on a typical buy to let investment, saving landlords an extra £1,600 on average for each property they bought.

Phase 4 - Don’t Lose Sight of Income: The last six months have been characterised by rapid house price inflation, boosting landlords’ capital returns, but rents began to fall again by the early autumn. The result is a declining yield. Those who focus on capital growth without an eye to a sustainable yield place themselves at greater risk if interest rates rise again. Their rents may not cover their mortgage payments.