Looking for rare gems to diversify your RE portfolio? Investing in parking lots may be the answer.
In the U.S. alone, the parking lot and garage market is worth $10 billion, with the market on an upward trend since the pandemic in 2022.
According to an interview with CNBC, one of the two largest players in the parking lot industry, SP Plus (SP+), estimates an accelerated growth in their business of “high single-digits” in 2023 and beyond:
But is owning a parking lot a smart investment for you? What pros and cons should you consider?
And, if you decide to invest, how do you buy and manage a parking lot?
Read on to find out all of that and more.
Are parking lots a good investment? Pros and Cons
We touched on the potential of a parking lot business a moment ago, but let’s dive into the full pros and cons.
There are some big positives to consider, but also a few cons you’ll want to be aware of that should be factored in.
Consider these points when thinking about whether to invest in a new parking lot business:
Pro: Low maintenance
If you invest in rental property, you can breathe a sigh of relief: maintaining a parking lot is significantly less work.
In exchange for constantly replacing sinks, repairing roofs, and cleaning and updating entire properties when tenants move, as a parking lot business owner, you typically just need to the following:
- Keep your asphalt clean
- Reapply paint for parking lines when they start to fade
- And the occasional maintenance on your payment terminals
Pro: Offers a stable, recurring income with high profitability
Investing in a parking lot business is highly profitable due in part to low overhead as well as the ability to freely increase rental rates to protect from inflation.
In addition, by leasing your lot to a third-party operator (as opposed to managing it yourself), you get the benefit of a stable recurring income with a high level of predictability and virtually no overhead.
Pro: Potential for conversion
An often overlooked benefit of investing in a parking lot business is that it offers the potential for conversion and redevelopment in the future.
With very little development time to get the lot up and running, you can turn a profit quickly while paying down the land.
Then, in the future, you can sell that location to someone for development for a large potential profit.
Pro: Growing (and consistent) demand
Another benefit of investing in a parking lot business is its incredible resilience in the face of economic change.
The parking lot industry is relatively recession-proof. There are not only more vehicles on the road than ever before– more than 275 million, according to the latest statistics– but people’s driving habits remain largely unchanged no matter the economic climate:
Even when recreational driving is down, work never stops. Especially when it comes to the city, people are always looking for affordable parking.
That can make downtown areas and business districts particularly good areas for investing in a parking lot.
Con: Lot leases can be expensive
Now, let’s cover a few of the cons.
Investing in a parking lot comes with several major pros, but a few cons exist as well.
One of those is that lot leases can be very expensive to take on.
Depending on how you invest in real estate– namely, rentals– you might be accustomed to this already and know that it comes with the territory.
However, if you’re primarily a flipper or use similar strategies, the high overhead could be a turn-off.
Make sure the numbers work out for you before taking the first big step. The last thing you want is to make a big investment in a lot and realize your margins aren’t high enough to justify the investment.
Con: You need to consider management
When it comes to investing in rental property, management is a given. It’s no different with parking lot businesses.
A successful parking lot business requires:
- Security
- Parking lot attendants (depending on how you set up payment)
- Maintenance
- And more
A moment ago, we touched on how the level of overhead and maintenance necessary with a parking lot business is far lower than a typical commercial apartment complex.
However, it still stands that you’ll need to hire a management team, namely parking attendants, to manage your lot.
This can take time and often a little trial-and-error to find a team that works for you.
So, make sure to factor that into your calculations when estimating expenses and your potential return.
Con: High competition and location dependent
Where there is high profitability and demand, there’s inevitably going to be high competition.
While this isn’t something to shy away from– it’s competitive because it’s profitable, and so many want to get in on that profit– it is something to keep in mind when you consider marketing and projecting profits.
Particularly when thinking about where to purchase your lot (how much competition is there? How well are the lots in the area managed?).
If you pick a bad location, you’ll barely get by and never realize the potential of your investment.
How profitable are parking lot businesses?
In the last section, we touched on the fact that a parking lot can be profitable, but just how profitable?
Given you’ll likely already have one or more other investments in place, it can be useful to gauge what kind of returns you can expect to see from the average lot compared to your other properties.
Keep in mind that the location and overhead can greatly impact your level of revenue and profitability.
However, here are a few high-level numbers to give you an idea:
- Average initial investment: $10,000-30,000
- Development time: 1-3 months
- Revenue: $70,000 – 350,000 average (Varies greatly depending on lot size)
- Profit: 30-40% (Not factoring in third-party management)
By all measures of real estate investing, those are great numbers.
One important factor, however, is third-party management which can eat into your profits.
Is a parking lot passive income?
A parking lot can be a decent source of relatively passive income if you use a third-party management company.
While it will eat somewhat into your profits (like hiring a property manager), a great choice is to have your lot managed by an established lot management company.
In exchange for a percentage of profits, you’ll obtain 100% hands-off management from a professional company that knows what they’re doing.
This will turn the lot into a consistent source of near-passive income, though in exchange, you give up control.
How to buy a parking lot and start your parking lot business
So far, you should have all the information you need to decide if investing in parking lots (or parking garages) is right for your portfolio.
Now, let’s talk about how to buy a parking lot.
By no means is this list exhaustive, but it should give you a much better idea of what to expect and look for when purchasing a parking lot or other car space:
Here’s how to start a parking lot business:
1. Find a location with (ideally growing) demand
If you’re a seasoned property investor, you know the game here.
You don’t just want to find a great price and a location where other parking lots seem profitable.
You also need to find a location where demand is high. And, preferably, where demand is growing.
This will not only ensure profitability now but also well into the future.
Some ideal areas to consider for your new parking facility include:
- Near airports
- Repurposing old properties in developing business districts
- Quickly growing urban areas
- Parking extensions for large community centers such as shopping malls
- Or areas without a lot of street parking or other free parking (the ideal location for many parking lot businesses)
If you have a target market, consider where they’re currently parking their vehicles during work and play and try to see if you can find a location that would offer them greater convenience.
2. Consider how you’ll acquire the initial capital
The necessary capital for purchasing a parking lot of average size is relatively low compared to other property investment types.
With that said, you’ll still need to acquire, on average, somewhere between $10,000-30,000 initial capital for the land purchase as well as money for:
- Redevelopment (if you’re converting an old property into a lot)
- Management, and
- Initial maintenance
Private equity investors are the obvious choice here. There are dedicated firms that offer capital to developers investing in a parking lot business.
However, they’re generally hard to get access to and shouldn’t be counted on.
Another option is good ol’ cash straight from your business bank account, as the initial capital can be relatively low (especially for a small lot if you’re just starting out).
Finally, if you have a small portfolio and you’re looking for simple ways to diversify, you could look into developers offering small numbers of parking spaces (or even a single space) of their lot to investors as a starting point.
In that kind of agreement, the developer typically uses your investment capital to maintain the lot and continues managing it themselves, offering an interesting, fully passive income opportunity on a small scale.
3. Decide on your revenue model(s)
There are several ways to drive revenue with parking lots, but you’ll want to have an idea of what your primary methods and parking services are before development begins.
One popular option is to set up automatic payment stations that have dynamic pricing programmed into their terminal.
For example, higher pricing on the weekend and evenings with lower pricing in the morning and on weekdays.
Or, if it’s in a business district, you could offer a special monthly rate to encourage recurring customers to become members or valet parking.
Those members receive a discount in exchange for paying for a full month upfront, as many locations in Los Angeles offer.
Alternatively, you can lease your entire lot to a third-party management company.
They’ll run your lot for you, allowing you to collect recurring payouts based on a percentage of profit after paying for expenses and the management company’s cut.
4. Set your rates
Lastly, it’s time to decide on your rates.
This will directly tie into the last point of deciding on your revenue model as the model you choose will impact your profitability.
To figure out your rates, look at the other lots in the surrounding area and see what they’re charging at various times of the year and your average week.
Factor in their proximity to notable destinations when considering pricing differences, and how that impacts your lot’s location.
Lastly, consider your overhead, including everything from payroll for attendants to business insurance and even one-time costs such as initial equipment investment, security cameras, business license fee, etc.
Diversify with your own parking lot business
Investing in parking lot businesses can not only diversify your RE portfolio, they can also be a profitable and worthwhile investment in their own right.
Plus, a peer-to-peer marketplace like Neighbor can allow you to make the most of your investment and drive revenue in a way you never could before.
With Neighbor, you can fill your lot vacancies– such as during a slow season– allowing you to maximize the profitability of your parking lot investment year-round.
Learn more about becoming a storage host with Neighbor.
No matter what tools you use, we hope this guide helped you get a clear idea of how to start a parking lot business and whether it’s the right investment for you.
