To Determine the Land Rental Value of your Property you Need to Know Your Land Market Value

Land lease values can be another way of valuing your farmland acreage. Essentially, the land lease value of a property is the land rent value minus any taxes on the land and then divided by a capitalization rate (don’t worry we’ll break down the math for you in this article).

Across the country the value of land varies state to state. The true value of your farmland depends on many factors like the state it’s located in, the attributes of the property, the type of soil that’s found there, and what the surrounding area is like. For instance, farm land in Iowa is double the value per acre as farmland in Nebraska. However, instead of valuing property based on what it could sell at. We propose that people should also calculate the land rental value of their property.

Why Would Someone Want to Lease Farmland Rather Than Buy It?

The main reason someone would want to lease farmland is to extend their farming operations or for more pasture for grazing for their animals. Furthermore, a younger farmer without the capital required to purchase property might want to begin their career in farming and leasing a plot of land to do so would be more cost efficient to them.

Ted Gwartney is an Appraiser and Consultant to the Government in Municipal Finance. He speculates that land rent is an, “important source of public revenue” as it is a way of preventing extreme speculation in land prices. His argument suggests what we already know here at landlease.com. When people have less money to spend up front to buy property, they can invest more funds in purchasing the necessary equipment, construction services, and the wages that go along with that to develop the land for their intended purpose, rather than paying exorbitant prices for the land itself.

That money flows back into our economy rather than just sitting in the value of the soil they purchased.

In order to determine what the proper lease price should be per acre, you should first determine the value of your property. There are a few options available to you to determine your land value. First, you can take a trip to your agriculture extension office. Or if you have the funds, you could find a certified rural appraiser.

Determine your Land Market Value

Find a Certified Land Appraiser

 A land appraiser will assess your land based on a few basic principles. From those he will extrapolate an estimate of what your land should be valued at. They will assess your soil type, the productivity of your land, the water access that your property has, the types of rocks there, and the topology among many things. However, the value of your land rests very deeply in what someone is willing to pay for it and an certified assessor will help you figure that out.  the real value is what someone is willing to pay, and the appraiser attempts to figure out what that number is.

Basic Principles used to Assess Land Values

Land assessors base their estimates of land market values on a majority of principles, the basics are listed below.

  • Substitution – the value of the property is set by what someone would be willing to pay for another piece of property very similar to yours. This principle assumes that to buy your property is not any more complicated of a process than buying the piece of land that mimics yours.
  • Supply and Demand – this is a basic principle found throughout all economic transactions. This concept is formed from the idea that the value of the property will increase if the demand for that type of property in that area increases without there being more property available to purchase.
  • Anticipation – the value of property can actually fluctuate with the idea that a future event that could directly impact the land could take place, whether good or bad.

Calculate Your Land Lease Value Using the Determined Market Value

The formula for land rent values is shown in the images below.

Some terms you should know:

  • Land Lease Value: the YEARLY amount a person would pay to use your property for an extended period of time.
  • Land Taxes: a portion of the land lease value is collected by the local government in taxes to be put back into the community
  • Capitalization Rate: this is the determined market rate of return that would attract investors to invest in your land (it takes into account all the risks and benefits associated with investing in it).
  • Land Market Value: this is the value your certified appraiser would have determined for you.

References:

Estimating Land Values by Ted Gwartney, MAI