Land Rents and Land Value

Land rents are payments for the right to use land. Land value is the sum of the present value of all perpetual land rents. If land rents are periodic constant payments, then the relationship between land rents and land value can be represented by a simple formula:  

Land Rent = Land Value * Interest Rate

This  is also called the capitalization formula. The interest rate used in this formula is also called the capitalization rate.

Using the formula, we can calculate periodic constant land rents from land value and interest rate, or calculate land value from periodic constant land rents and interest rate.

 Example 1:   suppose the land value is $400.00 per acre and the interest rate is 5%, what is the annual constant land rent per acre? Using the land rent calculator, the answer is $20.00. 

  Example 2:   suppose the annual constant land rent is $25.00 per acre and the interest rate is 6.5%, what is the land value? Using the land value calculator, the answer is $384.62.

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Dr. Weihuan Xu

Last Updated: January 23, 2002 .