Tiny homes are among today’s fastest-growing real estate trends. These small living spaces are the subject of new HGTV shows, dedicated Instagram hashtags, and more recently — investors’ watch lists. According to a survey from IPX 1031, over half of Americans would consider living in a tiny home — while almost 86 percent of first-time home buyers would consider one. Given these numbers, it makes sense why a tiny home investment could be just what your portfolio needs.
Tiny homes have risen in popularity alongside trends of minimalism and eco-friendly living. They can be bought and sold using several traditional real estate strategies. But, there are some unique considerations to understand before getting started. Keep reading to learn about the pros and cons of tiny home investments and how to get started today.
What is a Tiny Home?
A tiny home is a property between 100 and 400 square feet, typically featuring an extremely efficient design to allow for the best use of space. For context, the average size of a single-family home in the United States is 2,500 square feet. To make up for the missing space, tiny homes often have large windows, high ceilings, and furniture that serves multiple purposes.
Tiny homes can be built in a variety of forms, including as mobile homes or permanent structures. While some tiny home owners build their own structures from the ground up, others convert existing buildings into tiny homes. For example, sheds and storage containers can be converted into tiny homes. These properties are thought to have emerged in the 1970s, though they have become most popular in recent years.
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Benefits of A Tiny Home Investment
As you might be able to guess, the most significant benefit associated with tiny home investments is the cost. Due to their small size, tiny homes have relatively low purchase prices when compared to traditional properties. Many investors will be glad to know the price is not the only advantage:
Minimize Maintenance/Operating Costs: A smaller home means less area to maintain over time. This is great news for investors in regards to marketing the property and reducing operating costs.
Potentially Profitable: Tiny homes can be operated as long or short-term rentals, offering investors the chance to earn passive income from these small properties.
Cheaper Utilities: These small properties are known to have less utility usage, which can save investors, owners, or renters money in the long run.
Minimize Ecological Footprint: Not surprisingly, tiny homes are associated with a more environmentally friendly way of life. From the small size to low upkeep, tiny homes aim to minimize their own ecological impact.
Occasional Location Flexibility: If you opt for a mobile tiny home, the location can change over time. This kind of flexibility can be an interesting addition to any real estate portfolio.
Drawbacks of A Tiny Home Investment
The number one challenge faced by aspiring tiny home owners is where to build or place the home. Many locales have zoning laws that regulate a minimum square footage for builds in that area. If you move farther out, there may be trouble securing the necessary utility connections. Here are a few other cons to keep in mind before buying a tiny home:
Limited Space: It’s not always easy to live in a 400 square foot (or less) space, especially if you have spent your entire life in a larger home. This hurdle can be challenging when marketing the property.
Mortgage Complications: Generally speaking, most mortgage lenders have a minimum loan amount around $60,000 (much more than the average price of a tiny home). Investors may need creative financing methods or cash to finance a tiny home.
Unclear Market: While tiny homes have grown in popularity in recent years, it’s hard to predict exactly how they will fare 10 or 20 years down the line.
How Are Tiny Homes Valued?
Tiny homes are valued at about $300 per square foot, roughly two times the price per square foot of a traditional home. However, tiny homes remain to be significantly more affordable than conventional properties. The difference in the price per square footage can be attributed to the efficient design of tiny homes.
When searching for your own tiny house investment property, consider building one. This strategy can result in long-term savings and allow you to customize the property. Like traditional real estate, certain features are associated with a higher return on investment, such as heating, AC, or laundry space. However, you should only attempt to build if you have an experienced team; mistakes can be costly.
How to Invest in a Tiny Home
When looking at the question, “is buying a tiny house a good investment?” It is important to realize that tiny home investments can exist in many forms. There are numerous real estate investing strategies that can be executed to make a tiny home lucrative. Here are a few of the most common ways to invest in a tiny house:
Depending on the market, tiny homes can make great short-term rental properties. You can opt to list the property on a rental website and manage the place yourself, or work with a property management company. Either way, by adding a tiny home investment to your portfolio, you could create a steady stream of passive income.
Building a tiny home can be a profitable strategy with the right execution. When you are done building, you can sell the completed home or rent it out over time. The most important thing to keep in mind here is to plan an efficient build. Pay attention to timing, permits, and materials, as these costs can add up quickly, even on a small project.
Invest in a Monthly Rental
Tiny home investments can also be rented to long-term tenants on a monthly basis. This strategy offers tenants the chance to experience the lifestyle of a tiny home without the obligation of buying. For investors, monthly rentals provide consistent passive income and a less hands-on property management approach.
Flip Existing Tiny Homes
Interestingly enough, tiny homes make excellent candidates for fix and flip properties. The reason is that the stakes are often lower with a smaller, more affordable home. Investors can rehab these properties and sell them for a profit, usually in less than six months. Over time, you can even build up a network of owners and other investors to bring in consistent leads.
Tiny homes offer several possibilities for investors across the country. Not only are these great candidates for rehabbing, but they also make solid rental properties. Given the low cost and small environmental footprint, they can be easily marketed. While there are some disadvantages to consider before getting started, tiny home investments are gaining traction in the industry for a reason. With only 400 square feet, you could add a big-impact investment to your portfolio.
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