CHAPTER
4

Financing a Tiny Home

In This Chapter

  • Learning how to estimate your tiny house build so you don’t lose money
  • Lowering your construction costs to save thousands of dollars
  • Saving money to reach your goal quickly
  • Discovering financing options for your tiny house build

In an ideal world, everyone could make a wish for a tiny house at bedtime and wake up with the cash under their pillow in the morning. If your version of the tooth fairy isn’t that generous and you don’t have that kind of cash on hand, you’ll need to think about how to pay for your new home in more traditional ways.

In this chapter, we cover everything from estimating strategies, to effective ways of saving money, to financing options available on the market. With those pieces in mind, let’s get you on your way to affording your tiny house!

Estimating 101

Estimating the cost of your house is not for the faint of heart. There are hundreds of moving parts and thousands of items that go into putting a home together, even a tiny one. Do it right and you’ll fall within budget. Do it wrong and you could end up running out of money halfway through the build.

Set yourself up for a successful build by learning how to estimate not only the cost of materials, but also how long each task will take. Even if you plan on hiring someone to build your tiny house, it’s beneficial to know how to estimate so you can be sure you are being charged a fair price.

Before any estimating can begin, you’ll need a set of architectural plans and a materials list to work from. Whether you purchase a predesigned set, create one yourself, or hire someone to draft it for you, a materials list is essential. Several tiny house plans on the market come with such a list, which can save you hours of work.

Contractor-Built vs. Owner-Built Homes

The first question you’ll need to answer when you’re estimating costs is whether you’ll build the house yourself, hire out specific aspects of the project, or hand the entire thing off to a professional. Each option has its benefits and drawbacks. Weighing each one against the other is a great way to discover what the best scenario is for you.

For many tiny housers, the ultimate dream is to build their own home. Creating shelter with our own two hands is burned into our genetic code, and for many it’s a bucket list priority. Estimating time and materials as a first-time owner/builder will prove to be quite challenging, though, because there’s no way for you to know how long each task will take.

The good news is that there are several resources that can help you estimate not only material costs but also the man hours each task should take. We highly recommend you pick up the most recent construction estimating book you can find. These publications are updated yearly and the dollar values are adjusted by region. This is important because construction costs in Sonoma, California, are much higher than in Des Moines, Iowa, for example.

In terms of how long each task will take, we suggest you double the man-hour figures shown in estimating books since those are calculated for professional builders. This should give you a nice buffer while you learn how to build and also leave room for fixing any mistakes along the way.

You can also pay a contractor for a bid on your architectural plans. If you intend on doing the whole build yourself, be up front with them and offer to pay them for their time in creating this bid. Ask them to break it up between time and materials rather than presenting it as a lump sum. Keep in mind that contractors not only work faster than you do, but often get special pricing on materials. This bid will not be exact, but it will give you a general idea of how to budget for the project.

If you hire someone to handle some of the tasks during your build, you’re still considered the general contractor. That means the responsibility of having an accurate construction estimate falls on you. An advantage of having a professional builder on your team is that she can likely help you along the way and advise you with your cost estimates.

TINY TIP

You can save big by being your own contractor and building your tiny house yourself. Although the fees charged by contractors are well within the scale of reasonable, those fees can be avoided if you take on the position of general contractor yourself. There are risks in this approach, such as potential lack of experience. However, if you run the job well, the savings will be worth it.

If you hire a general contractor to build your tiny house, the burden of cost accuracy falls on him. Once you’ve agreed to a price and signed a contract, it’s up to him to ensure that it all gets done within budget, barring any changes to the scope of the work.

Most general contractors charge upward of 15-20 percent of the total construction costs as their fee. On a project that costs roughly $30,000 in materials alone, eliminating that fee would save you $4,500 to $6,000 right off the bat. If you add the cost of labor into that equation, your savings will be even higher.

Count Every Nail

One common area in which new builders miss costly details in their estimating is on items such as glue, structural brackets, nails, screws, and other small items. For example, one box of framing gun nails can cost as much as $180. Imagine how quickly your costs will add up if you forget to add these items into your calculations!

Having a complete set of plans and a materials list to work off of is your best resource. Keep in mind that you need to budget for waste in your calculations. A safe rule of thumb is anywhere from 10-15 percent waste. This number changes as the project gets more complicated in design and execution.

How Schedule Changes Can Make or Break a Project

Managing time on a jobsite can be one of the most important aspects of staying on budget. Time is money. Changes to your schedule can come back to haunt you. This is especially true if you are building the house yourself but hiring subcontractors for some portions of the build.

Imagine that your plumbing contractor calls on Monday morning to let you know that he can’t make it to your jobsite on Wednesday as planned. Instead, he will be out there on Friday. No big deal, right? It’s just a couple days. Besides, you could use that extra time to clean up some details in the framing.

You call up the next subcontractor scheduled for the project, the electrician, and inform her that she won’t be able to start work on Thursday after all but will need to come that following Monday. “Drat,” she says, “My company is jumping on a big job that day and no one will be available for three weeks.” Your schedule just got severely delayed because of a two-day change made by the plumber.

TINY WARNING

Small schedule changes can turn into big hassles quickly. Make sure everyone on your build team, including subcontractors and anyone else you’re working with, understands all of the scheduling constraints you might have ahead of time.

Not only can this schedule change be a major inconvenience, but it can also cost you money depending on your situation. If you’re renting your shop space or need to move out of your current location by a certain date, you could end up going over budget. Do your best to keep your project on schedule and you’ll minimize headaches as well as potential costs.

The True Cost of the DIY Builder

Most DIY builders fall into one of two categories:

  • The weekend warrior club in which each member works tirelessly during the few hours they have off from their day jobs
  • The full-timers club where the member quits or pauses his day job while building his tiny house

Both of these options have costs associated with them, which should be factored into your overall estimate.

If you’re a part of the weekend warrior club, anticipate significant fatigue and a potential decrease in productivity and mental clarity not only on the jobsite but also at your day job. Building a house, no matter how small, is hard work and requires a lot of focus. Budgeting downtime is essential for the long term. Make sure to give yourself several months to complete your build if this is your chosen path.

If you choose to work on your tiny house build full-time, you likely won’t be earning income during that period (unless you have a business that generates residual income and can be left on auto-pilot). This loss in wages most definitely needs to be factored into your estimate. Depending on how much you make per hour, it sometimes makes more sense to hire someone to build the house for you, especially if your job will be at risk when you are ready to go back.

Simple Ways to Lower Costs

When it comes to building a house, most people are looking for money-saving strategies. After all, the costs associated with house construction, even a tiny one, are often bigger than any other purchase you’ll make in your lifetime. Fortunately, there are several opportunities for saving money before and during your build. Here are our top three.

Lowering Tool Costs

Few things can deplete a savings account faster than a blind shopping spree at the local tool supply store. Fortunately, you don’t have to spend a sizeable portion of your budget on tools if you get creative. Between bartering, borrowing, signing up for a local tool co-op, and/or buying used, you can save thousands of dollars.

TINY TIP

Save big on tools by using the following strategies:

Look for used tools on Craigslist, in pawnshops, yard sales, etc. When you’re done with your build, sell them back to your local community to recoup the costs.

Create a tool cooperative (if one doesn’t exist in your area) in which community members invest in a tool supply that then gets shared as needed.

Borrow tools from your weekend warrior friends. Reciprocate their generosity by offering your time on their projects.

Here’s an important detail for you as you’re daydreaming about the tool collection you’ll amass for your build. Unless you live on a piece of property with an extra tool shed, you’ll likely be short on space in your new tiny house for all those tools once the job is done. This means that it really might not make sense to buy new tools when you’ll just end up selling them at the end of the job anyway, so be resourceful when you can.

Using Salvaged Materials

The use of nonstructural salvaged materials such as cabinets, sinks, and the like can bring your costs way down. On the other hand, there can be a lot of risk when dealing with structural materials because it could be impossible to tell if they’re still safe for tasks like framing and carrying loads. We suggest you avoid using salvaged structural materials. If you do decide to use them, be sure to work with an engineer or other professional inspector who can verify the quality and strength of the materials. No amount of initial cost savings is worth risking the overall quality of your build and safety of your home.

Sinks, doors, windows, and more can all be salvaged. Places such as Craisglist, FreeCycle, and the Habitat for Humanity ReStore are all great places to look for bargains. You can also talk to local remodeling contractors to find out if they have projects underway that you’d be welcome to pull materials from. You might be surprised how many contractors are willing to let you pilfer their discard piles. When you take materials off their hands, it saves them on disposal fees.

Finally, you might be able to score some good deals at window/door retailers or lumber yards. It’s not uncommon for contractors to place orders that are subsequently changed by the client. In those cases, brand-new materials are often sold as “seconds” at a great discount.

Corporate Sponsorship

This you-scratch-my-back-I’ll-scratch-yours idea might already have seen its best season. When tiny houses first exploded in popularity, many companies became interested in sponsoring high-profile projects as a way of getting their products in front of more people. Although less popular now, sponsorship could still be an option if you ask the right people and provide them with the right incentive.

The best way to gain sponsorship is by creating some buzz around your build early on. Media channels are still covering the tiny house movement and there’s a good chance that your local news stations will be interested in your project. We recommend approaching companies you’re seeking sponsorship from after you have some press interest.

TINY TIP

We recommend the following book for learning how to get corporate sponsorship for your build: Gaining Corporate Sponsors for Your Tiny House by Andrew Odom.

Be specific when asking for what you want and be clear about what you can offer in return. Most companies are looking for positive reviews of their products in the form of a blog post and also exposure for their products in news stories. Be certain to only choose items that you’re confident you’ll like so you don’t end up in an awkward position of having to say nice things about something you hate.

Saving for Your Project

Even the humblest savings will add up if you stay focused and patient. If you find yourself tempted at the checkout line by something you don’t ultimately need, consider if exercising patience in that moment might help you get closer to your tiny house dream.

Take the time to open a new savings account dedicated solely to your tiny house build. Set up a savings plan so that each week, a fixed dollar amount is automatically withdrawn from your checking account and deposited into your tiny house fund. Contribute what you can and remember that the more aggressively you save now, the quicker you’ll be living in your tiny house.

Can you put away $10 a week? $200 a week? More? Remember that you’re supporting a life goal here, not a short-term gain. Putting aside $200 per week translates to an annual savings of $10,400. That is a significant amount of money. In fact, if you add those funds to your salvaging efforts, tool-sharing savings, and the decision to self-build, you might have enough to build your house in full in just one year.

Lowering Your Living Expenses

Most people spend hundreds of dollars more per month than they really need to. Let’s look at some common areas where a routine change can make a significant impact and get you closer to your tiny house dream.

  • Reinvent shopping. The average American spends $200 per month on impulse buys that are later regretted because they serve no real purpose. That’s $2,400 annually! Learn a new way to shop. Bring a list from home each time you go out. If you see something you like that’s not on that list, don’t buy it, even if it feels really important. You can always add the item to the next list. We recommend you wait at least seven days to really consider whether it’s worth spending your money on that item. Remember that you pay for items not only with money but also with the time it took to earn it.

TINY QUOTE

“Beware of little expenses; a small leak will sink a great ship.”
–Benjamin Franklin

  • Cut the cable. The average monthly cable bill is $100. Why not save $1,200 per year simply by cutting the TV habit? You can still watch movies through inexpensive online subscription services such as Netflix, and there’s endless free content online as well. If you’re a huge sports fan, buy an online season, like we do for ice hockey, for a fraction of cable costs.
  • Break up with the barista. An average adult spends $1,000 per year at coffee shops. Create a new routine in which you make a fantastic cup of coffee with all the trimmings at home and easily save a cool grand each year.
  • Momma’s cooking. The convenience of eating out is expensive. Avoid it when you can. By not eating out for just one meal per week, a family of four can save $1,500 per year. If you’re a terrible cook, buy a secondhand cookbook or pull some recipes from the web for free. Cooking for yourself is less expensive and also healthier, which will save you money down the line with lower health-care costs, too.
  • Smoking and drinking. We all know that smoking and excessive drinking are not good for our health. They are also expensive habits. A pack-a-day smoker spends $2,352 each year on cigarettes. The average beer drinker? A whopping $1,250 per year.
  • Drive less. Gas is expensive. Take a few minutes to calculate how much money you spend on gas yearly. (The national average is $2,000.) Look at alternative transportation options to get you where you need to go. Perhaps you can work from home and eliminate a commute all together? Perhaps you can do away with a car by using public transportation and renting a car for road trips? See what you can do and put the excess money into your ever-growing savings account.
  • Skip the Hollywood ending. The average American household spends more than $2,600 in entertainment yearly. This includes going out to movies, concerts, sporting events, and other activities. You might be able to save more money than you realize by renting videos to watch at home, or going on hikes in nature when you feel like doing something. Look for free shows and events in your community. Our little town in Southern Oregon offers amazing free shows in the park during the summer. We also have a monthly “First Friday Art Walk” involving dozens of galleries that offer free admission and often snacks and beverages to anyone that wants to attend.
  • Stop hoarding. There are more mini-storage facilities in the United States than there are Starbucks and McDonalds combined. The average cost for a small 5’x5’ unit is $50 per month for a total of $600 yearly. Some people pay twice that when renting a larger space. Imagine spending all that money on stuff that clearly isn’t needed for daily life? If you have a mini-storage unit, this is the first place to start your downsizing process. You’ll save money by cutting those monthly payments and make a profit when selling everything that’s just been accumulating dust.

TINY TIP

There are many other ways to save money in your day-to-day life:

  • Learn how to cut hair.
  • Groom your pets yourself.
  • Buy secondhand clothes.
  • Switch to generic brands.
  • Buy whole foods rather than processed food.
  • Bring a homemade lunch to work.
  • Buy in bulk (as long as the food doesn’t go to waste).
  • Resist the urge to upgrade electronic gadgets.

Chances are that when you calculate the savings from driving less, quitting smoking, drinking less, eating at home, curbing your shopping habits, and getting rid of your cable, you’ll be close to that $200/week savings mark. Remember the goal of $10,400 per year? Suddenly it’s within reach.

The best part is that none of those options require life-threatening sacrifices. You don’t have to starve yourself or live without shelter; rather, you simply need to make some modifications in your spending habits.

Financing Your Home

There are several approaches for securing financing on a tiny house, and those options are expanding regularly. Some of them are conventional while others are outside the financing box. Let’s go over each one and assess what your options are.

Banks and Credit Unions

Banks and credit unions are risk shy and as such, aren’t keen on handing out loans for tiny houses on wheels. THOWs are seen as high flight risks. If the homeowner defaults on the payment, the collateral (the tiny house) could be in a completely different state by the time the bank realizes it. Tiny houses on foundations, though, are a completely different matter and are much more viable when it comes to standard bank loans.

DEFINITION

So just what is a credit union? In case you don’t know, credit unions operate in much the same way that banks do but they’re nonprofit and owned by members. They can accept deposits, hand out loans, and provide various financial services. Any profits made by the credit union are returned to members by way of reduced fees, lower loan rates, and higher savings rates.

This doesn’t mean that banks will never fund a THOWs build. The popularity of tiny houses has piqued the interest of some lending institutions and it’s likely just a matter of time before conventional loan options become more readily available.

The same thing happened in the insurance industry; no one was willing to insure a Tiny House On Wheels (THOWs) until one broker stepped up to the plate and created a way to underwrite them. Now insurance options are available for nearly every tiny house type out there, including self-builds.

Most banks require a tiny house to have some type of certification to prove that it’s well-built, safe, and investment worthy. This could be a Recreation Vehicle Industry Association (RVIA) certification, a certificate of occupancy, or a third-party inspection report. Because the loan process happens prior to construction, you’ll know if you need to plan for certification before you start the build.

In general, local credit unions are more likely to lend on unusual projects than are larger banks. Credit unions are a great place to start. You might only have one or two of them locally, so it’s important to approach them with a clear plan of action. You’ll want to present a professional and complete application that addresses all of their concerns from the get-go.

Lines of Credit and Equity Lines

If you already own a home and are looking to downsize to a tiny house, you’re in a great position. Banks are much more willing to lend when there is a low-risk asset (such as a home on a fixed foundation) that they can claim as collateral.

A lot of people are taking advantage of this scenario and building tiny houses in their backyards. They’re renting out their large house while living in the smaller one and using that income to offset their living expenses. Some people with high equity in their homes live in areas where rent is so astronomically high that they’re able to quit their day jobs and live a lovely life funded entirely by the rental income.

Another financing option with a bank (if you own a house) is a line of credit. This is slightly different than a home equity loan, but provides you with the necessary funding nonetheless. The great thing about this option is that you don’t typically have to specify what the money is being used for, which can be helpful if your bank is nervous about funding tiny houses.

Finding Private Money

There are always investors interested in loaning money for unconventional projects; you just need to connect with the right people. This could be as simple as looking in your local newspaper. To be crystal clear, I’m not suggesting you get involved with anything risky or dangerous. These are not “brown bag” loans where cash is handed out in the back of a diner. A legitimate investor will be professional and above board with everything. A contract will bind you both to an agreement. It’s a good idea to run the contract by an attorney in order to make sure you won’t be presented with any surprises down the road.

TINY WARNING

Never accept a loan from someone without sealing the deal with a contract. This not only protects you but also the investor. Repayment deadlines, fees, and terms should be clearly spelled out so there’s no room for interpretation. Always have a lawyer review a loan contract with a private party.

You should also look at angel investor websites, which connect you with people looking for interesting projects to invest their money in. These websites typically take a percentage of the loan as payment, increasing your interest rate. However, that cost hike may be worth it since your investor will have been professionally vetted.

Private money funding is more expensive than funding through bank loans because you’re dealing with individuals who don’t have the backing of a large corporation to protect them. They typically have higher interests. Just how much more you’re willing to pay is up to you.

Tiny House Lending

Tinyhouselending.com connects individuals looking for loans with their direct lending partners. The application process is simple and the lenders understand the tiny house industry, which is a huge bonus. Excellent credit is required for approval, however.

Their interest rates might cost more than conventional financing because they offer unsecured loans, which don’t require collateral. The borrowed money can be used to purchase a completed tiny house, pay for materials, or even to secure land.

Depending on the lender, there might be closing costs. Although loans might be available for up to $100,000, most fall under the $50,000 range, which is ample for most tiny house builds.

Builder Financing

If you plan on hiring a builder or a company to build your tiny house, be sure to ask them if they have financing options. More and more companies are offering this to their clients.

Banks are often more comfortable writing up a loan on a professionally built home for two main reasons.

  • First, the builder knows the trade and is more likely to complete the construction properly, on time, and on budget.
  • Secondly, the builder gets paid only once his or her work is complete, typically in scheduled draws against the loan. This provides an incentive for them to finish the project so that the bank isn’t left with an unfinished home due to a defaulted loan.

The Importance of Contingency Funds

No matter how you fund your project, whether building it yourself or hiring it out, be sure to add a contingency fund to your financing portfolio. This is a “just in case” fund that can really come in handy if something goes unexpectedly wrong or last minute changes are made that impact the project cost.

On a conventional loan, there are no fees for the contingency fund and you aren’t even charged interest unless you use it. If you need it, it’s available but if not, it simply goes back to the bank.

If that option is not available through your lending source, you can opt to increase the value of your initial loan. The drawback there is that you’ll pay fees and interest on the money, even if you don’t use it. It’s better to have that option, though, than to get stuck mid-project without any contingency backup at all.

The Least You Need to Know

  • Estimating your build can be a challenge, but with the right tools in hand, you’ll be able to anticipate how much it’s all going to cost and minimize financial surprises down the road.
  • You can lower your construction costs by thousands of dollars by buying used tools and salvaged materials.
  • If you save $200 per week for one year by cutting back on nonessential items, you’ll accumulate more than $10,000 to apply toward your tiny house build.
  • If necessary, you can look for loans for your tiny house build through conventional banks, credit unions, private lenders, and tiny house builders.
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