How Living Tiny Could Change Your Life Financially…
Tiny homes have become a popular housing solution in recent years, offering various financial advantages for individuals and couples seeking a more affordable, environmentally sustainable and minimalist lifestyle. This article explores the financial case for buying a tiny home for homeowners seeking passive income.
There are four main home-owner profiles that would benefit from purchasing a tiny house including:
- Homeowners seeking an affordable investment
- Young couples aspiring to save for future property ownership
- People seeking affordable housing solutions, and
- Single women facing housing challenges.
Today let’s look into the homeowner seeking an affordable investment…
Homeowners Seeking An Affordable Investment
For homeowners who already own their own property and land, building a tiny home offers an exciting opportunity to downsize and generate passive income through rental. By moving into the tiny house and converting their existing home into a rental property, these clients can benefit from several financial advantages.
a) Rental Income: Renting out their larger home allows homeowners to enjoy a steady stream of rental income, which can supplement their finances and cover the expenses associated with maintaining both properties.
b) Tax Benefits: Owning a rental property opens the door to various tax deductions, such as mortgage interest, property taxes, insurance, and maintenance costs. These deductions can significantly reduce the tax burden for homeowners.
c) Mortgage Reduction: Rental income can be used to accelerate mortgage payments on the original property, leading to an earlier payoff and building equity faster. If the mortgage has already been paid off, the rent becomes significant passive income for the landowner.
d) Lower Expenses: Living in a tiny home significantly reduces utility bills and maintenance costs compared to larger homes. This cost reduction allows homeowners to allocate more funds toward investments, personal savings or scaling back their work.
Properties that lend themselves to this solution include larger properties but also suburban blocks with rear access or those that back onto parks, reserves or paddocks. Tiny homes and gardens can be designed to maximise privacy for both the big house and the tiny home.
AN EXAMPLE
A middle-aged couple live in a 4 bedroom, 2 bathroom home in Mullumbimby, NSW on a large block that they’ve lived in for 20 years. The mortgage is down to $200K. The couple’s children have moved out so they’re not using most of the rooms. They’re thinking about downsizing to a tiny home and renting out the big house to a young family as they’d love help maintaining the property and enjoy having kids and dogs around (but don't want their own). They choose a tiny home with two bedrooms so there's still somewhere for the kids to stay when they visit.
BEFORE TINY HOUSE:
MORTGAGE: $200K
REPAYMENTS: $300pw
AFTER TINY HOUSE:
COST OF TINY: $170K
SAVINGS: $20K
NEW MORTGAGE: $350K
REPAYMENTS: $500pw
RENTAL INCOME: $900pw
PASSIVE INCOME: $400pw
DIFFERENCE: +$700pw
NB* Assuming a high interest rate of 10% you would need about $360K in superannuation to gain $700pw in passive income from your super.
The couple find a lovely young family to share their space who haven’t been able to find accommodation because they have a dog. In just a short time, they become quite close, creating a wonderful sense of community support. Having extra hands on deck makes the garden and house maintenance much less overwhelming - freeing up time for both the landowners and the renters. As a result of the extra $700pw the couple have in their pockets and lower utility bills, they don't need to worry as much about saving super so can afford to semi-retire and spend more time travelling.
Note: This is a hypothetical example - dollar amounts may vary based on the cost of the tiny home chosen, interest rates and rental amounts in different areas.
