Should Your Next Investment Property Be a Parking Space?

There are many ways to invest in real estate, including several weird ones. Among the more unusual options are parking spaces.

There are as many as 2 billion parking spaces in the U.S., which is a lot since the country only has around 250 million registered vehicles. While many of those spaces don't charge drivers to park in them, those in densely populated or popular areas cost money. As such, owners of parking spaces in these premium places can earn a pretty penny. That makes them a potentially lucrative investment.

Here's a look at some of the pros and cons of investing in a parking space.

Why investing in a parking space might make sense

One of the biggest deterrents of investing in real estate is the upfront cost. If an investor, for example, wanted to buy a single-family home to rent out, their initial outlay could be in the six figures when factoring in the down payment, closing costs, and any initial repairs. While some premium parking spots in major populated cities like New York and San Francisco can sell for close to that amount, investors can find some prime locations in other cities like Chicago and Phoenix with a much lower upfront cost of $15,000 to $25,000. They can then rent these spots out on a monthly, daily, or hourly basis and potentially bring in several thousand dollars of rental fees a year.

To put the returns into perspective, if an investor purchases a spot for $25,000 and then leases it to someone for $200 a month, they could generate $2,400 in annual rental revenue before expenses.

Another benefit of investing in a parking spot is that it doesn't take as much work as being a residential landlord. While the parking spot's pavement will eventually deteriorate and need repairs, investors won't have to deal with the notorious 2 a.m. phone calls from a tenant complaining about a leaky toilet. Meanwhile, if a month-to-month parking tenant stops paying their rent, an investor can have the car towed and lease the space to someone else, which is a much easier eviction process. Even marketing both long- and shorter-term parking spots can be much less work than screening tenants for an apartment, thanks to a variety of phone apps like SpotHero, BestParking, and Parker.

Why investing in a parking space might not be worth it

While a parking space can potentially earn an attractive return on investment, an investor still needs to buy it for the right price. That's because expenses such as taxes, insurance, and maintenance will likely run several hundred dollars per year, eating into cash flow. Meanwhile, as with any real estate investment, an investor could find themselves having to pay for a major expense such as an unexpected repair, which is more likely if the spot is in an older parking garage.

Another potential pitfall with a parking spot investment is uncertain appreciation potential. Because the market for parking spaces hasn't developed to the extent of other real estate investments, it might not gain value. Meanwhile, it could depreciate significantly in an economic downturn.

A longer-term concern with investing in parking spaces is the rise of ridesharing services like Lyft (NASDAQ: LYFT) and Uber (NYSE: UBER) and the anticipated eventual arrival of autonomous vehicles. These new services could significantly reduce the need for parking in congested areas. Instead of driving to a heavily trafficked area and dealing with the stress of trying to find a low-cost place to park, one can now request an Uber. Meanwhile, future owners of an autonomous vehicle could have it drop them off at their office or condo and then go park in a free or cheaper area when not in use.

Investing in parking spaces isn't for everyone

Buying a parking space to rent out is a lower-cost way to potentially generate an attractive passive income stream after expenses. However, a prospective investor needs to do a lot of due diligence before pulling into a parking spot investment. For starters, they must complete extensive research to find the right location and then be sure to purchase the spot for an attractive price. Further, they need to keep a close eye on emerging risks like autonomous driving that could dent demand for premium parking spaces. Because of those risks, parking spots might not be the best option for most real estate investors.