Renting vs. Buying a Tiny Home: Which Is More Affordable?

Tiny homes don't necessarily mean tiny prices.

Renting is expensive. But while owning a home can be more affordable, buying a home isn't cheap. (And there's even some question about whether owning a home is actually less expensive -- but that's a different article.)

One way some folks are side-stepping the housing issue is by downsizing -- all the way down to a tiny home.

Typically coming in at 500 square feet or less, tiny homes have been gaining in popularity over the last decade. These diminutive dwellings can have price tags lower than a new car, making them far easier on the budget than even a bargain apartment. Most even come with wheels, making moving a breeze.

But is a tiny home really the solution to your housing woes? Like most other things in this country, it depends on how much cash you can throw at the problem.

If you have the cash, it's easy math

For many folks who go tiny, buying a tiny home involves paying a specialist builder a lump sum of cash for a custom build. Going this route, you'll own your home outright. This means no more monthly rent or mortgage payments for the house itself.

However, as noted above, most tiny homes have wheels, not foundations. So, you'll need to park it somewhere. Some prefer to buy a cheap plot of land and park on their own property. Others may park for free on a corner of a larger lot owned by friends or family. And still others choose to park in RV parks, either settling in one for good or traveling from park to park.

The costs can vary considerably depending on which path you take. But even at the high end, your monthly costs for parking a tiny home will probably be significantly lower than paying rent in an apartment or home in the same area. (However, if you move your tiny home frequently, that could add quite a bit of extra cost.)

Of course, if you don't have the cash sitting around to buy a $30,000 to $150,000 tiny home, the math gets a lot more complicated.

The problem with financing tiny homes

To put it simply, financing a tiny home is hard. The typical tiny home is actually classed as an RV, not a house. So, unless it has a regular foundation -- which most do not -- you simply can't get a mortgage loan for a tiny home. 

Your main option for financing a tiny home is qualifying for an RV loan. Unfortunately, finding a lender can be tough, as not a lot of banks offer RV loans. Alternatively, you could try getting a personal loan, as they're much easier to find, but that has its own problems. 

RV loans

Cost-wise, an RV loan is almost always going to be the more affordable option of the two. Since RV loans are secured -- i.e., your RV (or tiny home, in this case) acts as collateral -- so they can have much lower interest rates than unsecured personal loans. If you have good credit, you can find RV loans with similar rates as regular auto loans.

Your monthly payment will depend on your loan terms. Some lenders offer a max term of 10 years on RV loans, while others will offer terms up to 20 years. The shorter your loan, the higher your monthly payment will be -- but the less interest you'll pay over the life of your loan.

Whether your monthly payment is less than rent in this situation will depend a lot on the details of your loan. (And you'll still need to add in the cost of parking your tiny home, as well as any associated moving costs for relocating it.)

Personal loans

If you choose to go the personal loans route, be prepared for some sticker shock. Unsecured credit usually has a much higher price tag than secured credit thanks to the increased risk. Since you'll likely be asking for a loan in the mid to upper five figures (if not more), be prepared to see APRs of 10% and up, even with good credit.

Even if you happen to get a reasonable interest rate, watch the repayment term. While RV loans can extend 10 years or more, personal loans don't. Many lenders max out personal loan terms at six years (and they charge more for longer loans). Those four years can make a huge difference to your monthly payment. Unless your rent is astronomical, chances are good taking the personal loan route will not result in much savings month-to-month.

No matter what, you're in a tiny home

If you're in it for the long haul, a tiny home can certainly be an affordable option. If you can buy it outright, you can cut your monthly costs to parking and moving fees. If you finance it, you can potentially cut your monthly costs. 

Even if you don't, however, after you've paid off the loan, you own your home. Then, you're in the same boat as the cash folks, with only parking and moving fees to pay. And, as we noted above, this is more than likely much less than rent in nearly any market.

However, before you get carried away by the math on how much you'll save each month, there's one last thing to consider: tiny homes are tiny. Yes, you may break even after a few years (or 10 or more with a loan), but -- are you ready to spend that long in 300 square feet?

Bluntly put, the lifestyle isn't for everyone.

Once you've spent your $30,000 to $150,000 -- or, worse, borrowed it -- you're now stuck with a tiny home (and potentially, a not-so-tiny debt). I'm not an expert in the tiny house resale market, but something tells me it isn't quite as hopping as the regular real estate market. If your current living room is larger than your potential tiny home, think twice before you buy.

For many people, the best answer is to downsize -- just not all the way to a tiny home. Simply moving into a smaller apartment can make a big difference to your budget without completely upending your lifestyle. Try to make it work in a smaller place before going from three bedrooms to three hundred square feet.