In a tight housing market with skyrocketing home prices, tiny homes can be an affordable alternative, particularly to first-time homebuyers. At first glance, these miniature dwellings represent an intriguing opportunity for real estate investors. But the tiny home trend comes with some big considerations
Although the tiny home category includes residences up to 600 square feet, the average size for a tiny home in the United States is much smaller, at only 225 square feet. That's about half the size of your average studio apartment in New York City, which now seems downright spacious in comparison.
Of course, aside from being eco-friendly, the biggest advantage tiny homes have is that they come with much smaller price tags. In fact, the average tiny home in the U.S. costs $52,000, about 87% lower than a regular home, according to a Porch report. The current median price for homes in the U.S. is $380,000, per Housing Tides. The three states that offer the most affordable tiny homes are North Dakota, New Hampshire, and New Jersey, where a tiny home price is less than 50% of the average annual household income.
When you break it down into square footage, though, tiny homes aren't the better deal one might expect. In fact, tiny homes are 62% more expensive than their big siblings in 48 of the states -- Colorado and Hawaii are the only two states where a tiny home will cost you less money per square foot than their regular-sized counterparts in the same state.
Another issue for investors to consider is that tiny homes are still out of reach for some buyers. The Porch report discovered that there are five states where tiny homes are still higher than the income of a typical family. Hawaii has tiny home prices that surpass typical income by 183%. The four other states where tiny homes are too big of a nut to crack are New Mexico (143%), Montana (also 143%), South Carolina (109%), and Nevada (107%).
Tiny properties come with big risks
Don't be fooled by thinking tiny homes come with tiny costs: They actually carry some big risks that could be bad news for investors' bottom lines.
For starters, since everything is custom made for a tiny home due to its compact sizing, it's more expensive to maintain features like appliances and plumbing. If things go wrong with electricity, heating and cooling, or sewage, it could end up being a big, expensive problem.
While many tiny home buyers and renters relish the opportunity to live remotely, being off the grid could be costly. Local zoning laws vary, and they can run up the cost of some tiny homes, particularly when it comes to accessing utilities.
Insuring tiny homes can be tricky, too. If you invest in a permanent tiny home, your best bet is to get manufactured home/mobile home insurance, according to Value Penguin. The problem is that there's limited fire coverage, which is bad news considering how much more quickly a tiny home can be engulfed in flames than a larger home.
Value Penguin reports the average insurance cost for tiny homes is $852. However, this is another cost that will swell depending on your region's weather conditions, particularly if tornadoes are a threat. Tiny homes in Oklahoma, part of Tornado Alley, cost 242% more to insure than the national average -- though it is still less than the cost of insuring an ordinary-sized home. Other expensive states to insure tiny homes include Tennessee, Kansas, Texas, and Colorado.
The bottom line
Real estate investors are not adverse to taking big risks, especially when they can lead to big rewards. Tiny homes represent a niche opportunity, though their inherent risks are anything but tiny.