Small-sized solutions to housing issues bring big profitability for investors
There are many stereotypes surrounding tiny homes and the people who might be interested in owning them: minimalists with only one pair of shoes; mountain people; hippies. Many people might think these structures are merely trailers that look more like portable classrooms than homes. In actuality, tiny homes are a great investment opportunity. What real estate investors are missing are the myriad uses of tiny homes and the high capitalization rate that comes from low acquisition and maintenance costs.
Historically, the majority of residential investment involves the acquisition of deflated run-down assets that can be rehabilitated for either a quick sale or rental income. Through the over-produced magic of “reality” television, more and more new investors are showing up to the game with wide eyes and wild dreams. The true reality is that as demand increases for these properties and supply remains stagnant, price increases and profits plummet. However, human nature keeps unsophisticated investors bidding up prices for the sake of “winning” at the detriment to their own profits. Thankfully, as savvy investors, we know the economic principle of substitution, which holds that a prudent investor would pay no more for an income-producing property than it would cost to build or purchase a similar property. So, why then would an investor pay $300,000 for a property with a monthly net income of $2,000 when that investor could achieve the net income with a $100,000 investment? The answer: ignorance of the existence of the $100,000 property. Here are a few of those properties just waiting to be added to your portfolio:
Managed Recreational Communities
Because most tiny homes are built in factories, the build cost is minimal. While the above example is for the Taj Mahal of tiny homes, most quality tiny homes that can be used for investment purposes in recreational communities cost around $80,000. What is included in the tiny home? Everything you would expect in a well-appointed Jr Suite in a hotel. There is a living area, kitchen, bathroom and bedroom. These fun hotel-suite sized stand-alone homes rent for hundreds of dollars a night and are professionally managed. With the advanced building materials utilized by manufacturers like the publicly traded Colorado company, Sprout Tiny Homes (OTCQB: STHI), these homes last decades and can be set on trailers, foundations, or even be built on-site. With such a low–acquisition cost, a tiny home purchased for recreational leasing can generate immediate positive cashflow and be a fun investment to manage.
Seasonal operation industries like mining, drilling, and construction have a need for safe lodging for their workforce. With the increase in demand for privacy, old fashioned “bunk houses” do not work. Tents are inappropriate and hotel stays drain profitability. Tiny homes currently are filling the need in seasonal workforce housing starting at $50,000. There are towns across the U.S. that have land that can be dedicated to workforce housing, but due to zoning restrictions, apartment complexes and hotels cannot be built. Tiny homes are easily able to fill this housing void. As real estate investors, partnering with companies like the Aspen Ski company or any of the oil or lumber companies would allow one to solve the workforce dilemma while ensuring a strong profit by providing inexpensive tiny home housing.
Affordable Housing Developments
Some cities and counties are hesitant to allow what they deem “trailers” (tiny homes) to be permanently placed for living. However, the building and management of apartment complexes are becoming increasingly difficult to finance. Without much red tape slowdown, an otherwise overlooked piece of land can become a trendy tiny home community. In today’s market where the lack of affordable housing plagues many people in dense urban areas and sprawling suburbia, tiny homes, and other energy– efficient home developments can be the answer. With the speed of manufacturing tiny homes, an entire community can exist in the matter of months, not years.
With certain states, like California, dedicating billions of dollars to solving homelessness, tiny homes can be rapidly manufactured and installed to provide safe and clean housing for those less fortunate. These homes can be manufactured for minimal investments and paid for with government grants and contracts. By manufacturing these homes in factories, the cost of construction is greatly decreased as most prevailing wage requirements are not applicable, which increases profitability over typical “stick build” small homeless housing complexes that have been more recently proposed.
Necessity has always been the mother of invention, and in real estate, the necessity for higher profits has driven innovation and continues to drive it. Tiny homes, while not yet mainstream, are higher profit– producing, investment–returning vehicles (literally, sometimes) and deserve a second look.
Joseph Johnson is a licensed California attorney who holds JD and MBA. He is the CEO of Sprout Tiny Homes, Inc., a publicly traded company. (OTCQB: STHI)