ADU vs. Tiny House: Making Sense of Small Home Options

An ADU can be attached or separate from the primary residence, while a tiny house is a compact unit below 400 square feet which can be stationary or mobile. Accessory Dwelling Units (ADUs) and tiny houses are popular small home options in the United States, each offering unique benefits and challenges. Over the years, they have surged in popularity as innovative housing solutions. 

If you are a homeowner considering alternative living options, you must understand the distinctions between ADUs and tiny houses. This article will explore the key differences, legal considerations, financial options, pros, and cons of ADUs and tiny houses, helping you decide about your housing needs.

What Is an ADU?

An ADU is a secondary housing unit on the same property as a primary residence. ADUs go by various names, including secondary suites, granny flats, backyard cottages, or in-law suites. Depending on your preferences, an ADU can be attached to the main house, like a converted basement or garage, or a separate, independent structure. An ADU typically includes a kitchen, bathroom, and sleeping area, making it a fully functional living space.

Types of ADUs

• Attached ADUs: As the name suggests, attached ADUs are built as an addition to the primary residence. They share a wall with the main house and can include side extensions, basement apartments, or attic conversions. If you want to maximize the existing space in your home without significantly altering the property’s footprint, attached ADUs are a great choice.
• Detached ADUs: These are standalone units separate from the main house. Unlike attached ADUs, these units can be built in various styles, from small cottages to modern tiny homes. They are a popular choice among homeowners with larger spaces because they provide more flexibility in design and location.
• Garage Conversions: These units are built by transforming an existing garage into a livable space. Garage conversions are appealing for homeowners with underutilized or unused garages. They are an efficient way of creating an additional living space without expanding the property’s footprint.
• Interior ADUs: These are converted spaces within the main house, such as basements or attics. Interior ADUs are economical and utilize existing space, thus an attractive option if you want to add living quarters without expanding your property’s footprint.

What Is a Tiny House?

A tiny house is a compact, efficient unit typically under 400 square feet. These houses have boomed in popularity in the United States because of their simplicity, affordability, and reduced environmental impact. 

They typically require less building material, little energy to heat and cool, and can be placed on land with minimal disruption. These homes focus on minimalism and smart design, making the most of every inch of space. Also, they can be built on foundations or trailers, making them mobile.

Types of Tiny Houses

Tiny Houses on Wheels (THOW)

Tiny Houses on Wheels (THOWs) are popular tiny houses. Built on trailer platforms, THOWs offer mobility and flexibility, allowing homeowners to relocate or travel while easily bringing their home with them.

Their design emphasizes space efficiency with various features, including compact kitchens, loft bedrooms, and multi-functional furniture. THOWs sound like a perfect fit for minimalists, adventurers, or those who crave a simpler, more transient lifestyle without sacrificing comfort or style.

Tiny Houses on Foundations

Unlike THOWs, Tiny Houses on Foundations provides a more permanent living solution. Like traditional houses, they are built on permanent foundations but on a smaller scale.

You can customize and design foundation-built tiny homes with smart home technologies, energy-efficient features, and long-lasting materials. Tiny houses on foundations are an excellent option for homeowners who desire a permanent, comfortable living space with a reduced ecological footprint.

Prefab Tiny Homes

Prefab (prefabricated) or pre-manufactured tiny homes are factory-built structures transported to the site for assembly. They are built off-site in controlled environments, ensuring quality control and efficient construction timelines. 

Prefab tiny homes are available in various designs and styles, from basic models to high-end customizable options. Prefab tiny homes offer flexibility in design, allowing for customization to suit individual preferences and lifestyle needs.

Benefits of ADUs

ADUs offer several advantages, including:

• Increased Property Value: Adding an ADU can increase the overall value of your property. The additional living space and potential rental income appeal to prospective buyers and make the property more attractive on the real estate market. ADUs can also enhance curb appeal and differentiate your house from others in the neighborhood, contributing to higher resale value and a faster sale.
• Rental Income: One of the primary benefits of ADUs is their potential to generate rental income for homeowners. You can supplement your mortgage payments, property taxes, and maintenance costs by renting out the ADU. This additional income stream can significantly improve your financial stability and offset housing expenses, making homeownership more affordable, especially in high-cost areas.
• Housing Flexibility: Versatile in design and functionality, ADUs accommodate various uses beyond rental income and multi-generational living. They can serve as home offices, studios, guest suites, or recreational spaces.
• Sustainability: ADUs promote sustainable living practices by utilizing existing infrastructure and minimizing environmental impact. They typically require fewer resources to construct than new, standalone homes and can incorporate energy-efficient features such as solar panels, LED lighting, and sustainable building materials.

Benefits of Tiny Houses

Here are some benefits of tiny houses for minimalists and budget-conscious individuals:

• Affordability: This is one of the primary benefits of tiny houses. Unlike traditional homes, the cost of building, maintaining, and purchasing a tiny house is significantly less. This translates to overall financial savings. The lower cost of entry makes homeownership more achievable for many people.
• Mobility and Flexibility: Some tiny houses are built on wheels, allowing homeowners to relocate easily. Therefore, a THOW might be your perfect match if you crave a balance between travel and a rooted, comfortable life. Also, tiny houses on wheels (THOWs) offer a portable housing solution that adapts to evolving lifestyles and preferences.
• Simplicity: Living in a tiny house encourages a simpler, clutter-free lifestyle. Downsizing to a smaller living area promotes prioritizing essential items, leading to less stress and a greater sense of contentment. Simplified living allows you to focus on experiences, relationships, and personal fulfillment rather than material possessions.
• Environmental Impact: Tiny houses use fewer resources and generate less waste, making them more eco-friendly than larger homes. As a tiny house dweller, you can significantly contribute to a more sustainable future because tiny house builders incorporate sustainable practices such as installing renewable energy systems like solar panels and using recycled materials.

Legal Considerations

Understanding the legal aspects of ADUs vs tiny houses is crucial, as regulations vary by location. 

ADU Regulations

ADU regulations aim to balance homeowner flexibility with zoning and safety standards, promoting additional housing options.

• Zoning Laws: ADUs must comply with local zoning regulations. These laws dictate parameters like setbacks, lot coverage, and residential zoning requirements, ensuring ADUs fit harmoniously within existing neighborhoods while adhering to local planning goals. You should check your local zoning code to see if ADUs are allowed in your area.
• Permits and Inspections: To build or convert a space into an ADU, you’ll almost always need permits. The permitting process involves submitting plans, paying fees, and undergoing inspections to ensure safety and building code compliance.
• Utility Connections: Your ADU will likely need separate utility connections for water, sewer, and electricity. Therefore, plan for trenching, meter installation, and adherence to local utility codes. Coordination with utility providers is essential to secure necessary connections and approvals.

Tiny House Regulations

These regulations vary significantly across different regions, reflecting local zoning laws, building codes, and community preferences. 

• Building Codes: Tiny houses can be tricky because they might not neatly fit into existing building code categories. Some states have specific tiny house codes, while others rely on existing codes for manufactured homes, residential structures, or RVs. This means your tiny house might need to comply with codes for plumbing, electrical, fire safety, and minimum living space, depending on how you plan to use it.
• Zoning Restrictions: Zoning laws dictate where and how you can place your tiny house. Some areas allow tiny houses on permanent foundations with special permits, while others restrict them to RV parks or designated tiny house communities. Check your local zoning code to understand placement limitations and setbacks from property lines.
• RV Certifications( if applicable): If your tiny house is built on wheels and you plan to move it around, it might need to comply with recreational vehicle (RV) certifications. These certifications ensure your tiny house meets safety standards for towing and living on the road. The specific requirements depend on your tiny house’s size, weight, and living facilities.

Financing Options

Financing small homes can be challenging, but there are several options available. Choosing the right financing option depends on your financial situation and the specifics of your ADU project.

Home Equity Loans (HELOC)

A HELOC is a good option if you have significant home equity and prefer a fixed interest rate. The lump sum disbursement allows for better budget control up front. However, qualifying for a HELOC does come with a number of conditions.

Renovation Loans

Renovation loans are designed specifically for home improvement projects, including ADU construction. They may offer higher loan amounts than HELOCs based on the increased value of the property after construction.

However, securing a renovation loan requires detailed project plans and contractor quotes upfront, along with potentially stricter eligibility requirements.

Funding Your Renovation Project With RenoFi

ADUs not only increase your home’s value after renovation but can also generate rental income. However, ADUs are costly. If you don’t have enough equity in your current home, funding ADU construction with a home equity loan is impossible.

For example, let’s say your current home value is $500,000, and your outstanding mortgage balance is $400,000. You are planning on adding an ADU and expect the value of your home to increase to $640,000. Your current loan-to-value ratio (LTV) is already at 80%, which means that most home equity loans are out of reach because that’s the maximum LTV they allow. So, your borrowing power using your current equity is $0.

RenoFi, on the other hand, would allow you to go as high as 150% LTV of your current value or 90% of your after renovation value, whichever is lower. So, in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000 by using the after renovation value of your home!

Get started with your RenoFi loan here

Personal Loans

Unsecured personal loans can also be used, though they may have higher interest rates than HELOCs or renovation loans. However, they offer a faster and easier application process compared to secured loans and don’t require significant home equity. They may also provide more flexible repayment terms.

Financing Tiny Houses

• Personal Loans: These are unsecured loans offered by banks, credit unions, and online lenders. Approval hinges on your credit score and debt-to-income ratio. Interest rates can be high, so factor in monthly payments before committing. Personal loans can finance the entire tiny house cost, but repayment terms are typically shorter (up to 7 years) than mortgages.
• RV Loans: For tiny houses on wheels, RV loans can be an option. But to qualify for the RV loan, your tiny house on wheels must meet specific safety standards. RV loans offer lower interest rates than personal loans and repayment terms can stretch up to 15 years. However, some lenders require the tiny house to be your primary residence. Be sure to check with the lender about any specific requirements for the tiny house to qualify as an RV.
• Manufacturer Financing: Some tiny housebuilders offer in-house financing options. These loans can be attractive due to their ease and potential for customization. However, interest rates might be higher than those banks or credit unions offer. Therefore, be sure to carefully review the terms and conditions before signing.

Cost Comparison

Understanding the costs of building and maintaining ADUs and tiny houses is essential for making an informed decision.

ADU Costs

An ADU can be a substantial investment, but the cost varies depending on several factors. Here’s a quick breakdown of the key expenses:

• Construction Costs: This is the biggest chunk of your budget. Depending on the complexity of the design and materials used, expect to pay $300 to $500 per square foot. A typical ADU could range from $60,000 to $225,000.
• Permits and Fees: Remember the paperwork! Plan on fees for permits, inspections, and reviews. These can vary by location but typically cost a few thousand dollars.
• Utility Connections: Bringing water, sewer, gas, and electrical lines to your ADU adds another layer of cost. The distance to existing connections and the complexity of the installation typically determine the cost. Factor in $2,000 to $10,000 for this expense.

Tiny House Costs

Tiny houses offer an alternative to traditional housing with potentially lower costs. Here’s a breakdown:

• Construction Costs: These can vary widely depending on size, materials, and complexity. DIY kits can start around $8,000, while prefabricated tiny homes with high-end finishes can reach $150,000 or more. Typically, expect a range of $30,000 to $53,335.
• Land Costs: Tiny houses can be placed on permanent foundations or trailers for mobility. Permanent foundations follow traditional home-buying procedures. For mobile tiny homes, consider renting land in RV parks or campgrounds, ranging from a few hundred to a thousand dollars per month.
• Mobility Costs: If you choose a mobile tiny house on wheels, there are additional costs associated with making it road-worthy. These include a trailer base, towing permits, and potentially reinforcing the structure for transport. You’ll also need to consider ongoing costs like gas for towing and finding campsites or RV parks that allow tiny houses.

Conclusion

Choosing between an ADU vs a Tiny house depends on your specific needs, budget, and lifestyle. ADUs offer the benefits of increased property value, rental income, and housing flexibility, while tiny houses provide affordability, mobility, and a simpler way of living. By carefully considering factors like lifestyle impact, legal requirements, and costs, you can make an informed decision that aligns with your goals. 

RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the after renovation value of your home. This allows you to borrow, on average, 11x more, get a low monthly payment, and keep your low rate on your first mortgage.

Ready to enhance your living space with an ADU or tiny house? Visit RenoFi today to start your renovation journey and maximize your home’s potential.