The average cost of letting a home rose to £676 in July as landlords increased rents for the sixth consecutive month, research suggested today.

The figure rose 0.5% on the previous month and was 2.3% higher than a year ago, with availability of properties tight, according to lettings agent network LSL Property Services.

The group said average rents were just £12 a month cheaper than when they hit their peak two years ago, before the market was flooded with properties being let by homeowners unable to sell.

David Newnes, estate agency managing director of LSL Property Services, said: “Rents are still playing catch-up with the gains house prices made in the last year. The recovery in prices 12 months ago caused an exodus of accidental landlords from the market, ending the glut of supply of rental accommodation.

“Although house price rises have levelled off, landlords are still reaping the benefits of the constrained supply, and the improving yields have restored a healthier balance to the dynamics of property investment.”

LSL does not expect rents to fall in the near future, saying that when interest rates rise again many landlords will raise their rents further to cover higher mortgage costs.

The number of tenants who were late with their rent fell to its lowest level last month since the group began collecting data in 2008.

Overall, arrears accounted for only 9.2% of all rent across the country, down from 11.2% at the beginning of the year.

The group attributed the improvement in arrears levels to thousands of frustrated first-time buyers being forced to rent for longer than they want to, but that these tenants' finances are often in a better state so they can meet the increases in rents.

LSL said an investment landlord buying a property now could expect to make an average return of 3.5% a year, about £5,838.

But it added that with house prices currently static, nearly all of these gains would come from rental income.

Newnes said: “The current market presents a golden opportunity for property investment before house prices resume their long-term upwards march. The underlying fundamentals that underpin sound property investment - demand and rental income - look set to remain strong.

“With a sensible investment model, a landlord can expect to see healthy returns, with any future capital appreciation a bonus.”