The tiny homes market is predicted to grow by a staggering $3.57 billion between 2022 and 2026, according to a Global Tiny Homes Market report. While trends like the off-grid and tiny house movement may have caused some to dismiss tiny houses, their popularity among investors is increasing for many reasons.
Tiny houses are more accessible to investors with limited capital because they offer a lower upfront investment than traditional houses. Also, the surge in demand for unique, affordable, and sustainable living spaces that use less energy and create less waste has given rise to a niche market for tiny houses as attractive rental options.
Their potential as accessory dwelling units (ADUs) allows investors to generate additional income streams through long-term or short-term/vacation rentals. You need to know several factors about the costs and potential returns of owning a tiny home as an investment property.
What Is a Tiny House?
A tiny house is a small, compact dwelling ranging in average size from 100 to 400 square feet. Tiny homes are designed to maximize functionality and efficiency in less space while providing a cozy and comfortable living environment.
The average price of a tiny house is around $300 per square foot, while a traditional home is about $150 per square foot. But whether you build or buy, a tiny home’s overall cost is lower than a full-sized home, depending on the add-ons you choose to include. Investors are increasingly drawn to tiny houses as ADUs, which can serve as rental properties and guest houses.
Tiny Home Costs: Building vs. Buying
Two main options for tiny house costs are constructing a custom build or purchasing a pre-built unit. Let’s compare the pros and cons of each to help you decide which is a good investment for you.
Constructing a custom build tiny house
Building a tiny home from scratch gives you more control to design a custom living space that meets your specific needs for lower costs than a pre-built one. However, building a tiny house requires careful planning and a significant time commitment. The cost of building materials, labor, and permits can add up, typically ranging from $20,000 to $150,000, depending on the size, quality, and location.
If you don’t want to start from scratch, you can buy a tiny house shell with an unfinished interior for around $17,000 to $37,000. For a separate cost, you can add plumbing and electrical power. There are also tiny home kits that cost under $10,000, with blueprints, a trailer to build it on, and a required supply list.
If you have construction experience, this may be an ideal solution. Shipping containers are another viable option. They cost around $10,000 to $35,000 on average, with larger homes costing up to $175,000.
Purchasing a pre-built or pre-owned tiny home
Buying a pre-built tiny home offers the convenience of not dealing with the building process and quicker availability for booking rentals. Prices for pre-built tiny homes can vary greatly, starting from around $30,000 and going up to $150,000 or more for high-end models.
You can buy a pre-built tiny house from builders like the Tumbleweed Tiny House Company, which offers a wide range of certified green styles with flexible payment plans and 3D virtual tours. While it may seem more expensive upfront, buying a pre-built tiny house can save you time, effort, and potential construction nightmares that can cost extra money during the building process.
You can also buy a pre-owned tiny house for around $30,000. Although you save money upfront, you sacrifice the ability to customize the space to your needs without additional expenses. You can find tiny homes for sale in your region by searching online for local and national listings on sites like tinyhomebuilders.com.
|Tiny house construction costs|
|Building from scratch (materials, labor, permits, etc.)||$20,000 to $150,000|
|Tiny house shell with an unfinished interior||$17,000 to $37,000 (plus electrical and plumbing)|
|Tiny house kits (blueprints, trailer to build it on, and supply list)||Less than $10,000|
|Shipping containers||$10,000 to $35,000 (on average)|
|Pre-built or pre-owned tiny house costs|
|Pre-built tiny house||$30,000 to $150,000 (depending on features)|
|Pre-owned tiny house||Starting at $30,000|
Other factors impacting tiny house costs
Many other factors may affect the overall cost of your tiny house. These include:
- The size of the space
- The add-ons that are included
- The building materials used
- Building permit fees in your region
- Utility access
- Built on wheels or a foundation
Remember that owners of tiny houses built on wheels don’t pay property taxes. Although you’ll avoid the tax for the house cost, you’ll have to pay for a place to place it because of zoning laws. You cannot park it on a friend’s or family member’s property for free.
Real estate taxes may apply if you buy land to put it on, and you’ll need to consider the down payment and interest rate for any financing you get, such as a land loan. Because of a lack of collateral, these loans may be difficult to get without excellent credit and a solid building plan to show the lender. Most investors pay cash for tiny homes or get a personal loan because these small homes don’t qualify for a traditional mortgage like a conventional home.
Income Potential for Tiny Home Investors
The primary advantage of owning a tiny house as an investment property is the ability to generate multiple revenue streams. Research the best business model for determining if a tiny house is a good investment based on your target market and region.
For example, you can build a tiny house on your own property to offer renters or purchase a property to park many tiny houses on as long-term or short-term/vacation rentals. A vacation property investor can list their home on Airbnb to attract those looking to pay for a unique lifestyle experience.
Many investors even purchase and develop land to rent space to tiny homeowners. Although, if you are a beginner tiny home investor, you may want to start with a single home and park it on your property to learn the ropes and prepare for making a larger investment in the future.
You can manage the tiny abode yourself or get a property management company to assist you. With the right strategy, you can create a steady stream of passive income from most tiny houses. Some investors even fix and flip tiny homes for a profit like traditional homes. The opportunities with most tiny homes are limitless because they’re mobile and smaller than a full-size home.
Calculating key metrics like net operating income (NOI), cash-on-cash returns, and return on investment (ROI) can help you evaluate the specific financial viability of your tiny house investment.
Increasing the Value of Your Tiny House
You can maximize your tiny house investment’s rental income and resale value in many ways. First, optimize the layout and design to maximize the limited small spaces available. Clever storage solutions for people’s stuff, multifunctional furniture, and efficient use of loft space can enhance the comfort and appeal of tiny home living.
Incorporating sustainable features like solar panels, energy-efficient appliances, and water-saving fixtures can attract environmentally-conscious tenants and reduce utility costs. Create inviting outdoor areas with seating, landscaping, and amenities to increase the overall desirability of your tiny house. But be aware that tiny homes can depreciate in value if they’re over-customized.
You can effectively market your tiny house by highlighting the unique selling points, such as proximity to local attractions, eco-friendly features, or a serene setting. Use online platforms, social media, and professional photography to showcase your property’s charm to gain the interest of potential tenants.
Challenges of Owning a Tiny House as an Investor
While tiny houses can be lucrative investment opportunities, some challenges exist.
- Zoning laws and legal restrictions can vary from one location to another. It’s crucial to research and make sure that your tiny house complies with local regulations. You’ll also need to get any necessary permits or approvals. Some areas have specific zoning requirements for tiny houses, such as being classified as ADUs or being located in designated communities.
- Financing options for tiny houses can be another hurdle. Traditional lenders may be less inclined to provide conventional mortgage loans for tiny house investments due to their unconventional nature and potential depreciation. However, you can explore alternative financing options like personal loans, contractor or building financing, RV loans, or home equity loans to fund your tiny home project.
- Maintenance and management can also pose challenges for tiny house investors. With limited space, regular upkeep and repairs become even more important. Whether through self-management or hiring a property manager, it’s important to factor in ongoing maintenance costs and ensure you have a plan for managing the property efficiently, like with a traditional home. Remember that tiny homes aren’t guaranteed to appreciate as much in value as a traditional house.
- Consider the limitations of the tenant pool or target market. While tiny houses can appeal to certain demographics, such as young professionals or minimalistic individuals, they may not suit every type of renter. Understanding your target market and catering to their needs and preferences is key to maximizing occupancy rates and rental income.
Is a Tiny House a Good Investment?
Investing in a tiny house can be profitable, but understanding the costs and potential returns is critical for making informed decisions. Whether you build or buy a tiny house, carefully evaluate the expenses and weigh them against the potential income streams.
As the tiny homes market grows, staying informed and adapting to changing trends and regulations, such as zoning restrictions, financing options, maintenance requirements, and target market limitations, is essential. By optimizing the layout, incorporating sustainable features, and effectively marketing your property, you can increase the value and rental income of your tiny house investment.
However, it’s also important to know the tiny house cost challenges. So, if you’re considering a tiny house as an investment, take the time to evaluate your investment goals, assess the costs and potential returns, and determine if a tiny house aligns with your real estate investment strategy. With careful planning and smart decision-making, a tiny home can be a profitable addition to your investment portfolio.
Get the Best Funding
Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.