According to Paragon, buy-to-let investors enjoyed another strong year in 2007 as total returns generated by the average residential property reached 21% - the highest level for 28 months.

With a combination of buoyant house prices, strong rental income and stable yields, the typical landlord generated more than £34,500 over the past year, according to Paragon’s latest buy-to-let index.

Growth in rental incomes have been healthy, reflecting demand for rented homes, with rents rising by 6% over the past quarter and 17% in the past 12 months to reach a new record level of £11,300. The average value of buy-to-let property has also been strong, rising by 15.3% over the year, but yields have remained at 6% or above throughout 2007 as landlords have been able to increase rents in line with property values.

Regions that have enjoyed the best total returns in 2007 are London, the East Midlands and the South West, with the East Midlands achieving the fastest annual growth in rents over the year. Yorkshire and the North West achieved the best yields during the year, with both regions at 6.8%.

John Heron, Paragon’s director of mortgages, said: “Returns generated by landlords are very good and compare favourably with alternative investment classes. An investment linked to the FTSE All Share made a year ago would have yielded just over 7.4% from both capital appreciation and dividend yield, while the highest yielding internet savings accounts earn around 6%. In comparison, the return of 21% on buy-to-let looks particularly attractive.”