How can I figure out how much to bid on a parking space?

Question

A nearby condo building is auctioning off 65 parking spaces within the building with no minimum bid. The condo is in the middle of the business district in my city. I'm interested in investing in one of the parking spaces to lease out and eventually resell. The parking spaces seem to be renting for about $250/mo and require a 6 month lease. There are property taxes and condo fees of about $1400/year. There's no restriction on reselling them, so I can eventually resell the spot either to someone in the building or to a different investor.

I've never invested in an asset like this before. How can I figure out what my maximum bid should be? What's a reasonable expected rate of return?

Answer 1

If the cash flow information is complete, the valuation can be determined with relative accuracy and precision.

Assuming the monthly rent is correct, the annual revenue is $1,600 per year, $250/mo * 12 months - $1,400/year in taxes.

Real estate is best valued as a perpetuity

P = i / r

where P is the price, i is the income, and r is the rate of interest. Theoreticians would suggest that the best available rate of interest would be the risk free rate, a 30 year Treasury rate ~3.5%, but the competition can't get these rates, so it is probably unrealistic.

Anways, aassuming no expenses, the value of the property is $1,600 / 0.035 at most, $45,714.29.

This is the general formula, and it should definitely be adjusted for expenses and a more realistic interest rate.

Now, with a better understanding of interest rates and expenses, this will predict the most likely market value; however, it should be known that whatever interest rate is applied to the formula will be the most likely rate of return received from the investment.

A Graham-Buffett value investor would suggest using a valuation no less than 15% since to a value investor, there's no point in bidding unless if the profits can be above average, ~7.5%. With a 15% interest rate and no expenses, $1,600 / .15, is $10,666.67. On average, it is unlikely that a bid this low will be successful; nevertheless, if multiple bids are placed using this similar methodology, by the law of small numbers, it is likely to hit the lottery on at most one bid.

Answer 2

Scenario 1: Assume that you plan to keep the parking space for the rest of your life and collect the income from the rental. You say these spaces rent for $250 per month and there are fees of $1400 per year. Are there any other costs? Like would you be responsible for the cost of repaving at some point? But assuming that's covered in the $1400, the net profit is 250 x 12 - 1400 = $1600 per year.

So now the question becomes, what other things could you invest your money in, and what sort of returns do those give? If, say, you have investments in the stock market that are generating a 10% annual return and you expect that rate of return to continue indefinitely, than if you pay a price that gives you a return of less than 10%, i.e. if you pay more than $16,000, then you would be better off to put the money in the stock market. That is, you should calculate the fair price "backwards": What return on investment is acceptable, and then what price would I have to pay to get that ROI?

Oh, you should also consider what the "occupancy rate" on such parking spaces is. Is there enough demand that you can realistically expect to have it rented out 100% of the time? When one renter leaves, how long does it take to find another? And do you have any information on how often renters fail to pay the rent? I own a house that I rent out and I had two tenants in a row who failed to pay the rent, and the legal process to get them evicted takes months. I don't know what it takes to "evict" someone from a parking space.

Scenario 2: You expect to collect rent on this space for some period of time, and then someday sell it. In that case, there's an additional piece of information you need: How much can you expect to get for this property when you sell it? This is almost surely highly speculative. But you could certainly look at past pricing trends. If you see that the value of a parking space in your area has been going up by, whatever, say 4% per year for the past 20 years, it's reasonable to plan on the assumption that this trend will continue. If it's been up and down and all over the place, you could be taking a real gamble. If you pay $30,000 for it today and when the time comes to sell the best you can get is $15,000, that's not so good. But if there is some reasonable consistent average rate of growth in value, you can add this to the expected rents. Like if you can expect it to grow in value by $1000 per year, then the return on your investment is the $1600 in rent plus $1000 in capital growth equals $2600. Then again do an ROI calculation based on potential returns from other investments.