Buying a parking space?!

Tom_H

Bit of a weird one here possibly!

Basically I've just had an offer accept on a house I like (woo hoo!) the only thing is parkig in the street isn't great (booo) but there's an off road spot, almost oppersite that I've seen for rent on-line (woo hoo!) now this is very hypothetical just at the moment, as the house buying could still fall through, but I was considering approaching the owner off the space to see if he'd consider selling it, rather than just renting it - but I had a few questions before I even really think about that I was wonderng a couple of things

Firstly how much would a space like that be worth? I know it'll be dependant on area, but doesn anyone have any idea of this happening to try to give me an idea? Or should I try to base an offer on rent times a certain amount?

Also, as it's technically buying land, would I have to pay all the same soliciotor fees and such as if I bought a house? If so it's probably won't be worth it!

The guy may not even want to sell anyway, but if he does I think it's worth me knowing this stuff before I approach him.

Thanks in adavnce for any help :beer:

Zelie

It's probably a nice little bit of pocket money for him. So I'd go with the rental-value-times-x approach. Perhaps work out what he could charge for 18 months and offer that? Though that will depend on whether it is rented out every day - if someone only uses it on weekends or similar then you could conceivably offer a bit less.

Tom_H

Zelie thanks for the reply I was thinking that - but at the monent he's offering it for £10 per day, but I very much doubt anyone ever takes him up on that to be honest! Parking round there isn't THAT bad and there is a car park reasonably close (Although I wouldn't like to put my car in it over night) - but s he's advertised it on that basis I'm not sure what he's be thinking of for a monthly or weekly charge. I should have asked in my origional post but does anyone have any idea of that? (I have been googling and searching for this since my last post as I thought it'd be easy to find but with no luck!)

princeofpounds

You want to capitalise the ongoing cashflow in order to determine what the capital value might be. That means taking the rental payments, assuming what rate that would be on an annual basis (incorporating estimates for thigs like void periods), and dividing by an appropriate discount rate (like an interest rate in a way).

The tricky part is determining what the appropriate discount rate is. It's not the rate on savings accounts, as those are zero risk (for the first £50k anyway) and very low hassle. It's probably closer to something like a 10 year fixed mortgage rate, as the asset is a durable (so you want a long term rate), real-estate linked investment. Rental yields for housing the area would also make sense, although the expected yield on a parking space is probably a bit higher for a variety of reasons like the small size of the investment, the hassle of management and so on. This means the price is a bit lower.

So, roughly speaking my thought would be like this:

- £8/day would be bargainable from the asking rent probably.
- 250 working days a year
- But 20% of them might be voids
- That implies £1600/yr rental value
- 1600/0.05 is £32k

You can swing the value *a lot* with different assumptions, but the point of the whole exercise is to demonstrate to you the trade-off that is implied between the two scenarios, one being investing the money in a parking space, the other being investing the money in paying off your mortgage.

Now you might also want to do the exercise with the on-road parking costs, so you can compare like with like.

Hope that helps.

lincroft1710

I'm not necessarily disagreeing with P of P's valuation method but am offering alternative viewpoints.

Commercial properties used to (may still do) have a yearly premium factor of 10, i.e. 10 times annual rental value equals capital value.

Depending on how you calculate annual rental in this case where max would be £3650 and min would probably be £2,000 then on that basis space could cost between £20,000 and £36,500 to buy.

However a more logical way (in your case) would be to find the value of a house like the one you are buying with off street parking, subtract the price of the house you're buying and result +/- 10% would be the approx value of parking space for your purposes.

Tom_H

Wow, thats all a bit technical for me! ha ha I reckon my more financially minded girl friend might be able to make sense of it better - but the basic idea seems to be you think it'll be worth in the region of £30 grand?! I was affraid it'd be something like that! think I'll just have to look at renting it for now then. ha ha

Thanks for the help all the same

Tom_H

Ahh Thanks lincroft- that's more the sort of thing I was thinking but wasn't sure if that was realistic - maybe IO should just make the guy an offer and see if he either accepts or scoffs!

Does anyone know anything re the legalities? would it be the same legal fees as for buying a house?

princeofpounds

Commercial properties used to (may still do) have a yearly premium factor of 10, i.e. 10 times annual rental value equals capital value.

The magic '10' is in fact derived from the very same process I just outlined, though I would suggest that large commercial property sells at a higher price and lower yield than that these days!

All that is done is to divide the NOI (net operating income) by the right discount rate. Multiplying by ten is the same as dividing by a discount rate of 10%, and this discount rate tended to work quite well as a quide when the UK was around its average interest rates of 5-7% in recent history, as you have to add a bit of a premium to account for the risk of the asset (being more risky than a deposit with the bank of england or commercial banks).

princeofpounds

but the basic idea seems to be you think it'll be worth in the region of £30 grand?! I was affraid it'd be something like that! think I'll just have to look at renting it for now then. ha ha

Not necessarily. My assumptions may have been too aggressive and the valuation is very sensitive. As you say yourself, £10/day sounds high, and to be honest it might be that this rate is just targeted at day-shoppers, so that voids might be 50% or even higher. And the discount rate might be too low.

To be honest, I suspect the fact that the valuation seems expensive is nothing more than the same reason making real estate assets generally seem very expensive - the BoE/govt have suppressed interest rates to historically unprecedented low levels. In a 'normal' interest rate situation of 6% (say) for the UK then the parking space would probably have a discount rate of at least 9%, and be worth more like £18k on those assumptions.

If on-street parking was easy to find, then this guy's prices would have little relevance and so you would use the parking permit rates to judge the 'cost' of parking in the equation. This is why parking spaces in the suburbs are worth almost nothing but in the middle of London can change hands for £50k.

The whole point of this approach is that it determines an equivalent course of action between leaving thing as they are now (keeping the money, but paying the fees) and how they could be (lose the money, but save the fees). But you have to be careful how you express it.

A final point - there are normally several ways to value an asset, and buyers and sellers might have different views on which is most appropriate. So looking at the difference between properties with and without parking is also perfectly valid, but if the seller views it as a financial investment, or doesn't have an adjacent property he's not going to care about that.

lincroft1710

P of P - although you're using £8 as a more realistic rent, perhaps even this could be too high, if we said £5 then using your method would bring it down to £20,000, which seems more reasonable for Tom's requirements.

Writing this took a long time so now see you're thinking perhaps £18K.

princeofpounds

You might be totally right. I have no idea what the real cost of parking is in that area, all I had to go on was the idea that he was asking £10. That might be a totally fictitious rate, although the problem is of course if he thinks it is worth that much it won't help his perceptions of the capital value of the space.