Should you invest in a parking space?
Remember my very very first post on the blog? (hmmm, probably not I guess)
Well, I was telling about one of my first quirky investment ventures: investing in parking spots! In short:
When I lived in Oslo, I purchased 2 parking spots in closed garage areas in 2015 with the purpose of renting those out. The real estate market in Oslo was booming at the time and the bank allowed me through a local variation of a home equity loan to borrow money against my home that had significantly increased in value. This mechanism allowed me to purchase those 2 parking spots with no money down. Cool, right?
I have now sold both of them (with the second one in October last year) and I thought it would be a great idea to recap the whole process and go through the numbers, so you can see a real-life case for yourself and evaluate if it is a type of investment you should consider.
Why I sold the parking spots
I moved from Oslo to Luxembourg in May of 2018 and both parking spots were rented out and were providing a sweet monthly income. This was cool but as I thought more about it, I did not want to manage them anymore. In my first post, I wrote that parking spots were easy to manage from abroad, that is still the case, but here I knew I was not going back to Norway so I decided to sell them (never say never though 😉).
Did I actually make money from this investment? Let’s run the numbers and find out!
The parking spots were bought in Norway, hence priced in Norwegian kroner, so I took a currency conversion in EUR of 10 NOK per EUR for simplicity (at the time of writing 1 EUR = 10,68 NOK).
For the first parking spot, I paid 35 000 EUR + 925 EUR registration fees. It was already rented out at the time of purchase and I kept the same rate of 150 EUR/month. I took it over in July 2015 and the new owner took it in the middle of September 2018, there were max 2 months of vacancy during that time, so let’s consider 36 months of rental.
There was a monthly maintenance fee of 20 EUR/month and my interest rate on the loan (R in the illustration below) cost me 59 EUR/month. The profit was exempted from taxes as the income was below the local tax-free threshold (2000 EUR/year).
My net profitability was hence : (150-20-59)*12/35 000 = 2,43% . From the rental income I have made 36*71 EUR = 2 556 EUR.
My other costs were 3 107,5 EUR in total: the registration fees of 925 EUR and the Real Estate Agent commission of 2 182,5 EUR upon selling.
For the second one, I paid 29 000 EUR and there were no registration fees (I discovered later on that I owned the rights of use, not the garage place itself). I found a renter in October of 2015 and he rented it until the 1st of August 2018 at 153 EUR/month for a total period of 34 months. I still had the place until October 2019 so we need to add 14 months of maintenance fee 😢. This parking spot was quite modern, there is a whole platform system to be able to park many cars in a garage facility, check out this 20 second video to see how it works.
The monthly maintenance fee was higher here 35 EUR/month and my interest rate on the loan (R) cost me 47 EUR/month. The profit was exempted from taxes as I was renting out my rights of use, not the property itself (weird, I know).
My net profitability was hence : (153-35-47)*12/29 000 = 2,93% . From the rental income I have made 34*71 EUR = 2 414 EUR.
My other costs were 2 590 EUR in total: I had to order a new remote for access to the parking area for 100 EUR, as these were upgraded. Let’s also add the 14 months of vacancy here: 490 EUR. The place was sold without a real estate agent and it cost me 500 EUR to sell it on the local real estate listing. Last but not least, in 2019, there was a proposition to upgrade the parking spots with electric chargers, which I paid 1500 EUR for as I wanted to sell the place and make it “attractive”.
That was a lot of numbers, let’s make it more visual!
Was it worth it?
As you can see from the table above, I made a total of 17,7 K, which is excellent considering it did not cost a lot of effort and I did not put any money down.
The major profit comes mostly from the sale of the 1st parking place which was located conveniently in the city center in a closed area with not that many spots. The scarcity of parking spots in that area certainly helped with the market price increase.
The second parking place while offering better profitability at first came with many extra costs over the years and it took me a while to get it sold, so this impacted my overall profit on that project. That parking spot was inside a well-secured and modern garage facility but there were many other spots which made it not as easy to get sold as the other one.
Would I do it again or invest differently?
If chosen well, these parking spots are a great place to start a small real estate portfolio:
- They do not require much cash or a large loan from your bank
- They offer a small profitability depending on your local prices
- You can make some capital gain after a couple of years
- If you pick the right location there is not much vacancy risk
- There is not much maintenance headache
- You are also building skills and knowledge as you need to negotiate, advertise, sell, learn about a specific niche and make the rental contracts.
Regarding price appreciation, I had both: A fantastic increase (42% on Garage 1) and a moderate one 12% in the same city in 2 popular areas, so the lessons here is that there is no sure shot.
Should I have invested in the stock markets instead? 64 000 EUR (the price of Garage 1 + Garage 2) invested in an S&P500 low-cost index fund from July 2015 to October 2019 would have produced approximately 90 610 EUR (without dividends), so I would have made more money with even less efforts. On the other hand in 2015, I was still learning the ins and outs of the stock markets. Not sure I would have been able to remain patient and not make wrong decisions along the way (and would my bank have allowed me to borrow for investing in the stock markets in the first place?).
If I was given the opportunity today, I would welcome a mix of parking spots and stocks to remain diversified. What I would do differently is to keep the parking spots for longer to benefit from increasing rental income and potentially higher capital appreciation.
Bringing it all together
When it comes to real estate, the power of leverage is real and as my real-life example shows, I managed to make 17K from the price increase of my home. I have also used that leverage effect to purchase a rental property but that is for another article.
What is really interesting here is that those two parking spots bought in the same city each show different results: Garage 1 was less modern but in an area with fewer parking spots. It offered lower profitability at first but then I was surprised when the real estate agent told me he managed to sell it for 50K. Garage 2 was in a more modern facility but then many extra unforeseen costs came along and it was more difficult to sell than expected.
Real Estate remains a solid way to build wealth for yourself but as safe as it may sound and even if you do plenty of research upfront, you will need to diversify (as with any asset class) and there will always be surprises on your path which will impact your profitability both positively or negatively.
Oh, and Fun Fact: We are 5 years later, people will still look weird at you when you tell them that you want to invest in garages or parking spaces.
What about you? Have you considered buying a parking spot to dabble into real estate? Did you even know it was possible in the first place? Were you surprised by the results?