How in the world do I actually buy a tiny house that I can afford?
…this is perhaps the most common question among aspiring tiny house owners. While the answer is not rocket science, there are a few options to consider.
Initial Considerations
What should I really be thinking about when it comes to financing and buying? Which one should I choose? Where do I start? These are all common questions to be asking.
We’re going to step through what you need to consider before even beginning the search.
Budget
If you read my other articles, you’ll notice a common message: a general budget is not good enough.
You must be very specific about what you can afford, what you are ready to spend upfront, what you are ready to spend month over month, and what the financial goal of your tiny house is. Going into this saying “I think I can afford about $50k” is simply setting yourself up for being financially strained.
So, if you haven’t budgeted properly, start there.
Cash Purchase vs Finance
While many may generally assume that a tiny house–a classic tool for ridding one of a mortgage–should not come with any sort of monthly payment, that is a misconception.
It is ok to buy a tiny house with cash. It is also ok to finance your tiny house. If the goal of your tiny house is financial freedom, then both options have an advantage.
Cash: This option is one of saving up money, putting it into a tiny house (via a purchase, build, or a mix), and then no longer having monthly loans or rent payments. To many this is the dream. It also requires…cash. This option is good for those that have over $40k available for the tiny house project, whether it is a build or a buy. If you have a lot of time on your hands and patience, you can do a DIY build for much less, but that is a different discussion that involves sourcing reclaimed materials. Generally, you aren’t going to be able to do this with all cash unless you have $40k or more available.
Financing: This option is one of saving up a small amount of cash for an upfront payment, but then using debt (a loan, seller financing, etc) to pay monthly installments. This is a much more realistic option for those that simply don’t have the upfront cash. Over time, this will cost more money, but it is more realistic for those that cannot spend more than $40k in one lump sum, or simply don’t want to. Either way, it is probably better than living in a standard house with a mortgage or hefty rent payment.
Do the Math
When determining whether to go with cash or finance, run the numbers. Start with the amount of cash you can afford to spend. That should not be all of your savings, since you need some money for an emergency fund.
If you determine that you can afford the cash upfront, and are willing to accept the risk that comes with parting with that money all at once, then you have your answer.
If, however, you determine that spending that amount of cash is unfeasible, unwise, or undesirable, then do the math on the financing.
To run the numbers on financing, you should first ask yourself: what do I currently spend on housing each month? If the tiny house is your second house, then ask what can I afford to spend additionally each month?
Here is an example:
Steve rents a condo currently for $500/month. He wants a tiny house for financial freedom.
Steve determines that he can pay $20k in cash up front.
Steve determines that he needs $60k for the tiny house that he wants. That means that he must borrow $40k.
Steve finds a lender that will lend him the $40k plus interest over the course of a loan. That means Steve must find a loan that is less than <$500/month for the tiny house to be worth buying.
Steve finds Lender A that will give him a 5 year loan, that is $40k + interest over 5 years or 60 months. This amounts to $667 per month plus interest putting him at $720/month (the interest is made up for this example). This will make Steve financially strained for five years, since he is spending more each month on his tiny house than he was before.
So, Steve finds Lender B that will give him a 10 year loan, that is $40k + interest over 10 years or 120 months. The interest is more because the loan is over more time. However, the $40k over 120 months amounts to $333, and the added interest makes the payment only $450/month. This is $50 less than he is paying in rent now and therefore makes Lender B a good option.
After 10 years, Steve has saved an extra $50 per month for 120 months. Steve has saved $6,000. Now, he is paying $0 per month. Compared to the $500 per month he was paying in rent prior to owning a tiny house, he will save $14,000 in just sixteen more months, bringing him to break even on his initial $10k cash investment after 11 years and 4 months of tiny house living.
Steve is now living rent free and debt free in his tiny home. Every month he effectively saves $500 that he couldn’t save before going tiny. Within 15 years of his initial $10k investment, Steve will have saved $22,000 he otherwise would have spent on rent.
After running the numbers, you will know if a tiny house is financially worthwhile and what kind of loan or cash payment you should seek. You may determine that renting a tiny house or remaining non-tiny is the route to go. The tiny house life has a ton of advantages beyond financial security, but that if your main reason is financial, make sure a tiny house will actually provide financial benefit.
Buying a Tiny House
Buying a tiny house with cash is relatively straightforward. What changes is simply where you buy it and from whom.
Tiny House Builder
Find a reputable builder to build your tiny house. Key word is reputable. The builder should be able to provide references, have a website and an online presence in general.
If you choose to go with a general contractor, proceed with caution. Find someone who has experience with tiny houses. Lots of people with experience doing handiwork think that a tiny house is easy to build. It isn’t. It is still a house construction project.
Don’t find yourself overpaying because you are with an inexperienced builder, or worse, getting fleeced. There are too many horror stories of builders taking people’s money and running away. Don’t be penny-wise and pound-foolish here.
Tiny House Listings
For tiny houses that are already built, you can find house listings. These houses are often used, so they are a bit cheaper (tiny houses depreciate in value like a car, as opposed to appreciating like a house).
However, a good tiny house online doesn’t necessarily mean a good tiny house in real life. You need to see the tiny house and know how it is built. For example, the insulation for a tiny house in Michigan is not the same as the insulation for a tiny house in Arizona. Likewise, the foundation or trailer the tiny house is on must be suitable for your needs.
Tiny house listings can be found online by a simple google search.
Tiny house kit manufacturers
This is similar to a builder, but there is a subtle difference. In this scenario, you are buying a semi-complete structure, typically a shell of the house, a shed, or a shipping container, and then you complete the rest. This gives you control over the cost and the project but you need to properly find the manufacturer of the kit. Just like with a builder, do your research, talk to them, and get some references. A company that won’t provide references is not worth doing business with.
Something to think about with cash for a tiny house is that once you spend it, it is gone. Aside from spending money on a lawyer, you are SOL if you make a bad purchase. I hear about it in tiny house circles all the time…people get scammed and others simply make legitimate but bad purchases. That is not the norm, but it happens. Be patient and picky, because in the Wild West of the tiny house world, it’s buyer beware.
Scary comments aside, know that the cash option is ultimately the cheapest and most liberating option if you do it right. It requires less debt and financial freedom faster if you can muster it. There is a reason they say cash is king!
Financing a Tiny House
There is a well-established goal in the tiny house community to shed oneself from debt, and this makes complete sense. Tiny houses are most definitely a tool for financial freedom.
With that said, you can be financially secure while still having debt in the form of a monthly payment. Financial stability and monthly payments are not mutually exclusive.
You are unlikely to get a traditional mortgage for a tiny house. Banks and mortgage lenders simply do not consider a tiny house for a mortgage.
The good news is that there are other loans available.
Tiny House Lender
Since tiny houses are a growing need but don’t qualify for a mortgage, there is a growing number of tiny house lenders.
In most cases, your tiny house lender is a lender of a personal loan, but they have experience dealing with tiny houses.
The key component here is to always employ the motto that if it is too good to be true it probably is. Don’t get scammed here. You need to make sure that the tiny house lender is legitimate. Here is a good NerdWallet article about tiny house lender reviews.
To vet a lender, shop around, read reviews, talk to them on the phone or in person, ask the lender for references, and be patient and deliberate in your search.
Seller Financing
While you may get seller financing directly from the current owner of a tiny house, the chances are slim. You are more likely to get seller financing when you go through a tiny house builder.
Generally speaking, tiny house builders are pretty expensive, but if they are within your budget then this option is viable. If you find a tiny house builder that is super cheap (less than $40k), it is probably a scam so steer clear.
Seller financing may come in the form of direct financing from the tiny house builder. It may alternatively come in the form of financing through a tiny house lender that has partnered with the tiny house builder. The benefit of this partnership is that the builder has already vetted the lender. The downside is that you may not have as much choice in the matter while still having to deal with both a builder and a lender.
Personal Loan
A personal loan is your classic ‘put on a suit, walk into your bank, and make your case for a loan’ situation. Of course, this is now done online as well.
If you have a relationship with a bank, credit union, or lender, this is a great place to start. Your bank may even have specific processes for personal loans related to tiny houses.
If you have poor credit, don’t have a lot of collateral (a car, cash savings, etc), then you may have more difficulty with the personal loan option. Even if you qualify, you might have higher interest rates.
Home Equity Loan
The home equity loan is a special kind of personal loan that applies to existing homeowners. If you already own a house and plan to get a tiny house for a secondary home or an ADU, then the home equity loan may be a good option for you, as it uses your primary residence as collateral.
Whether you have saved a lot or a little, you have options for getting your tiny house. Just remember:
Know your budget intimately
Run the numbers
Do your research
Take action
With these four steps, you can become a tiny house owner.
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