As a real estate investor, you should always be on the lookout for the latest investment opportunities. If you’ve been doing your research, you’ve probably read news about the latest housing market trend – tiny houses. Many call it the “Tiny House Movement” and it’s centered on downsizing for a simple lifestyle and the notion that people should be able to afford the homes they live in. The tiny housing market is quickly sweeping the nation and evolving from a quirky project to a serious undertaking. As a result, real estate investors are wondering whether getting involved in the tiny house movement is a good idea.
You might be asking: Should I buy a tiny house? Is a tiny house a good investment? Many agree that the answer to both questions is yes. Indeed, there is investment potential for tiny houses and buying one can be a smart strategy for making money in real estate. In this blog post, we’ll give you four reasons that explain just why you should consider investing in these types of investment properties and what to keep in mind before getting started. But first, let’s cover more details about tiny houses that you ought to know.
How Small Is the Average Tiny House?
According to The Tiny Life, the definition of a typical tiny house in the US is a home with square footage between 100 and 400 square feet. For comparison, the size of a typical American home is around 2,600 square feet. These real estate properties come in several varieties. For example, some are built on wheels and hook up to trailers to give their owners the ability to travel from place to place. Others, however, are permanent dwellings set on a foundation.
In addition, some tiny houses are designed and built by the owners themselves from scratch while others are professionally built. It’s also possible to convert a shed or storage container into a tiny house. To create the illusion of space, tiny homes typically employ hyper-efficient design, open floor plans, large windows, high ceilings, double-duty furniture, and micro-appliances. So, even though they come in different shapes, sizes, and forms, they all enable simpler living in a smaller, more efficient space.
How Did the Tiny House Movement Get So Big?
Let’s investigate a larger question: When and where did the tiny house movement come from exactly and why is it attracting such a great deal of attention these days? Some would think that this is a new housing trend but the truth is, the history of tiny houses is quite long. According to research, the benefits of buying and living in tiny homes emerged in the 1980s and started to gain attraction in the late 1990s. Then, the 2009 housing crisis – and the dramatic rise in foreclosures across the nation – only pushed the idea and interest in downsizing and living in more modest homes (including tiny houses) forward.
In addition, housing in today’s market accounts for about 37% of the average American’s budget – many spend even more. In addition, the gap between supply and demand is making it more difficult to find affordable homes for sale. Combine that with the fact that the mortgage interest rates are rising in most parts of the country and you’ll understand why the homeownership rate fell while the rental rate continues to rise. All of these facts conclude that housing is unaffordable for most Americans, leading them to decide between either living in rental properties or downsizing to smaller homes. Hence, why investing in tiny homes can potentially yield profits.
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How to Invest in Tiny Homes
So, how exactly can a real estate investor profit from buying a tiny house? Well, there are multiple ways of making money in the tiny house market. Here are four different ways you can invest in tiny homes.
#1. Rent Out Traditionally
The first way you can make money from a tiny house as a real estate investment is by renting it out or leasing it to a tenant. When you buy a tiny house and then turn it into a rental property, you’re creating a source of monthly rental income. This can provide you with a good return on investment – depending on where the rental property is located, of course. Make sure you invest in an area where there is demand for this type of real estate property. This way, you’ll ensure finding a tenant and that the rental rate there is decent. Check out the list of the best cities to consider for investing in tiny homes below!
Moreover, another thing to consider before renting out tiny houses traditionally is that they’re not fit for everyone. For example, a tiny house that works for an individual would not work for a couple or a family with a baby. As a result, you need to be realistic about what type of tenant is suitable to rent to based on the size and appliances available in your investment property. You don’t want to rent out to someone only for them to later realize that tiny living isn’t for them, leaving you with an empty rental that is not generating income.
#2. Rent Out as Vacation Rentals
While buying a tiny house and turning it into a traditional rental property is a good investment strategy, renting it out as a vacation rental is definitely the better option for most real estate investors. Many of today’s travelers (especially millennials) prefer to stay in non-traditional accommodations rather than a hotel room during their vacations. Besides RVs, lodges, and yurts, tiny houses have become a very popular choice for them as it gives them a unique experience. So, if you’re thinking of starting an Airbnb business as a way to invest in real estate and make extra income, tiny vacation houses are definitely something to consider.
Before jumping in, however, it’s important that you do your research and make sure that you know what’s required in your area. Some cities in the US have strict laws and regulations regarding what type of real estate property can be rented out on Airbnb and similar sites. Furthermore, there might be a limit on the number of days per year that the property can be rented out to short-term guests. Such regulations affect how much money you can make from your Airbnb rental. So, owning a profitable tiny house investment starts with research!
#3. Flip Tiny Houses
The tiny house trend has also opened up investment opportunities for house flippers. Flipping real estate has become a popular strategy for making money in real estate and many people are starting a house flipping business. However, the housing availability is shrinking – which can be both good and bad for flippers. This means that while flipped properties will sell faster, they are harder to find. As a result, house flippers need to be more innovative at finding investment properties. Hence, many of them have turned to flipping tiny houses.
There are two ways to flip tiny homes. The first way is for a real estate investor to simply buy a tiny house, renovate, and then sell for profits. Not only will you take on smaller square-foot projects and have lower costs, due to the demand for tiny houses, you’ll also have a pool of potential home buyers. So, your risk is lower when flipping tiny houses than a larger residential property. The second way is to buy a mobile home park and upgrade the units to tiny houses. Doing this will increase the value and appeal of the park, which you can then sell at a large profit margin. This is a creative investment opportunity that you should definitely consider.
#4. Renting Out Land
The final way to invest in tiny homes does not include buying or owning them; instead, it involves land. Say that you have the money but not the time to renovate or rent out a house. Simply buying land and renting it out to tiny homeowners is a great way to easily earn a monthly paycheck and make quick profits. Many owners of tiny houses (specifically those built on wheels) rent the land where their properties sit. This is a great investment opportunity if you own land – you can split it and rent it out to multiple tiny homeowners!
4 Advantages of Buying a Tiny House for Investment
Now you know how you can profit off of the tiny house trend in real estate investing, but the question we still need to answer is: Why do tiny homes make for a smart investment? How is it worth it for an investor to invest in tiny homes for sale? To break it down, here are four benefits of investing in these properties:
#1. The Price Is Right
Since tiny houses are smaller in square footage, it’s natural that they’re affordable. So, how much is a tiny house? According to The Tiny Life, current tiny house market trends show that a tiny house costs between $10,000 and $40,000. Factors that affect the prices of tiny houses include location, upgrades, rooms, size, water access, and yard. This affordable price makes buying a tiny house for investment a viable alternative for those beginner investors who can’t afford to buy a conventional investment property.
In addition, if you don’t want to buy one, building your own tiny home for rent is also relatively affordable and easy. Realtor.com estimated the average payout for building a 200 square foot home in the US runs from $25,000 to $35,000. For comparison, the median price of building a new home is $292,000. Add in the lower cost of taxes, utilities, and maintenance, and the financial appeal of tiny investment properties becomes even greater.
Looking for affordable properties in the US housing market for real estate investing? Here are 2 New Ways to Find Cheap Investment Property for Sale in 2019.
#2. They Are Easier to Manage
In addition to being cheap, tiny homes are also easier to manage on your own as a real estate investor. Smaller spaces require much less energy as they’re generally easy to maintain, clean, renovate, and move. You don’t have to worry about additional costs for major repairs like fixing a damaged roof or swimming pool. Likewise, you can save big on utility bills – like electricity and heating – since tiny houses offer a lifestyle that both conserves energy and is cost-efficient. Also, if you’re investing in tiny houses for rent and have a tenant occupying the property, you can choose your level of involvement to earn passive rental income without having to hire professional property management.
#3. They Appeal to Renters and Buyers
While tiny living is not for everyone, do a quick search on the internet and you’ll find stories from people who are and have been living in tiny homes for years. This proves how the tiny house movement is continuing to gain popularity across the country. Simply put, people are embracing the tiny life philosophy and are choosing to downsize and live with less. Many decide to rent tiny houses as paying rent for such properties is less expensive than the average rent for a single-family home or condo.
Buying a tiny house is also appealing to home buyers from baby boomers to millennials because they offer many unique features at an affordable price. As more and more owners of tiny houses share details on their comfortable lives, many people are following suit. For a real estate investor, this shows you that investing in these properties is bound to make profits whether you choose to buy tiny houses for rent or to flip and sell.
#4. More Units and Higher Return on Investment
When you combine the above advantage, you’ll get yet another reason to consider buying tiny homes for investment. The fact that these real estate properties are cheap, easy to manage, and are in demand tells investors that they’re perfect for building a profitable investment portfolio. In other words, you can buy multiple tiny houses to make more income over a short period of time. In comparison with conventional residential investment properties, tiny homes can make profits at a faster rate.
For example, you can buy a 10-unit multifamily real estate property and wait several years to buy another one. On the other hand, you can buy a tiny home, flip it, and reinvest in an additional property after only a few months! Alternatively, you can buy a number of cheap tiny houses for sale, rent them out, and have multiple streams of rental income! Years later, you would achieve a higher yield and have multiple investment properties under your belt than you would if you went with the multifamily investment.
Where to Buy a Tiny House
Are you now interested in investing in a tiny house? If so, you must be wondering where to buy one. After all, the investment location is key to success with any type of property, even a tiny one. And while tiny houses and communities are appearing all over the country, a few states are more popular than others. A recent study by Apartment Therapy found the five best places in the US housing market to live in a tiny house. A real estate investor can expect greater demand for tiny investment properties in these locations, which is why they’re ideal for investing. These locations are:
- Flat Rock, North Carolina
- Briley Township, Michigan
- Spur, Texas
- Fresno, California
- Washington County, Utah
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What to Consider Before Investing in a Tiny House
Before you jump into the tiny house trend, keep in mind that, just as with other real estate investment opportunities, there are some drawbacks to this strategy. Here are a few things to consider before investing in a tiny home:
#1. Tiny Houses Must Be Built to Code
If you’re thinking of building a tiny home, keep in mind that state and local governments have their own building codes for homes built on foundations. Tiny houses built on foundation often have to meet the same requirements as any other house. For example, you might have to prepare the land for construction, pull permits, order inspections, and pay to bring utility service to the site. So, make sure to check the codes in your area for tiny houses and build accordingly.
#2. Be Aware of Zoning Regulations
Besides codes, many cities have zoning regulations regarding tiny houses which can be strict. Some require you to own the land where you plan to build and rent out tiny homes. There are also regulations regarding the amount of square footage that a living space must have. So, if you want to buy a tiny house for real estate investing, make sure you find one that is zoned correctly. The last thing you want is to buy an investment property and rent it out only to discover that zoning laws don’t allow it to be occupied!
#3. They Don’t Appreciate Over Time
A tiny home built on wheels is not real estate even if you own the land it’s parked on. These are considered mobile personal property (not permanently fixed on the land) like cars and RVs. So, they are depreciating assets and you can’t expect them to appreciate over time like a traditional investment property. While the land’s value should appreciate in line with the market, the structure will have a smaller net of the total appreciation. Tiny homes permanently built on foundation, on the other hand, have better resale value. Still, you can’t expect to earn the same ROI compared to a traditional home.
#4. Financing Can Be Difficult
Depending on how you’re planning to buy the investment property, this could be a potential drawback. Unless your tiny home meets zoning and building code standards and is built on a permanent foundation, it won’t qualify for a traditional mortgage. You’ll need another alternative for financing a tiny house, like an RV loan, a personal loan or a credit card. However, these can have higher interest rates and require a higher credit score than a mortgage loan.
Nonetheless, considering that tiny homes are cheap, you can still afford to buy them fully in cash instead of taking out a mortgage. In fact, almost 68% of tiny house owners don’t have a mortgage, according to The Tiny Life.
Will You Join the Tiny Home Movement?
As the tiny house trend continues to grow in popularity, so does its recognition as a sound real estate investment opportunity. Ultimately, whether or not buying a tiny house will reward you with a good ROI depends on your personal and financial investment goals.
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