The Rise of Living Small: Tiny Homes vs. ADUs

July 9, 2024 - 8 min read

Want to live large but on a lesser footprint in a smaller-than-normal dwelling? Consider a tiny home or accessory dwelling unit (ADU). These structures emphasize spatial efficiency and generate big savings thanks to their lower square footage.

That begs an important tiny home vs. ADU question: Which is right for you? To make a more informed decision, read on and learn about the similarities and differences of these habitats, their benefits and drawbacks, what’s behind their popularity, and ideal financing options to ponder.

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Tiny homes and ADUs defined

A “tiny home”, similar to a granny flat, is typically defined as a small, compact dwelling, usually spanning between 100 and 400 square feet. It’s typically a standalone structure.

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“These homes focus on maximizing space efficiency and often include multi-functional furniture, lofted sleeping areas, and compact kitchens and bathrooms,” explains Pam Hutter, an architect and interior designer. “Zoning regulations and building codes for tiny homes differ significantly by location but commonly include requirements for minimum square footage, emergency egress, and utility connections.”

Traditional tiny homes, typically constructed on permanent foundations, come in various styles such as A-frames, cabins, yurts, and cottages. Container homes, made from shipping containers, are also stationary and can be surprisingly elaborate with multiple floors and decks. Tiny houses on wheels, built on trailers for mobility and classified as RVs, require electrical hookups and suitable parking spots. Park models, resembling manufactured homes but less mobile, are generally kept in RV or mobile home parks and are limited to 400 square feet.

But what about a tiny home vs. ADU? How do the two differ? An ADU, on the other hand, is often regarded as a step up size-wise from a tiny home yet not quite as large as a typical single-family home, although types of ADUs vary. An ADU is classified as a secondary housing unit on a single-family lot, usually ranging from 400 to 1,200 square feet. Some people turn them into a guest house or even rental unit.

“ADUs can be detached, attached, or converted from spaces like garages or basements, and usually include a bedroom, bathroom, kitchen, and living area,” notes Dennis Shirshikov, an adjunct professor of Economics at City University of New York.

Zoning regulations for ADU homes are often more standardized than for tiny homes, frequently allowing them in residential zones with particular requirements. Building codes for ADUs usually follow those for primary residences, ensuring habitability and safety.

Pros and cons of tiny homes and ADUs

In the comparison a tiny home vs. ADU, it’s important to look at the pros and cons of both options. This will help you see why some people might choose one over the other.

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Tiny homes boast their share of benefits. Among them:

  • Affordability in the form of lower construction and maintenance expenses. On average, a prefabricated tiny home costs about $300 per square foot, while custom-built tiny homes range from $250 to $450 per square foot.
  • Mobility, as they can be moved and relocated if built on wheels
  • Simplicity, as they encourage a minimalist lifestyle
  • Sustainability, as evidenced by a smaller environmental footprint.

On the downside, tiny homes suffer from:

  • Limited living and storage space, making them less than ideal for more than one or two inhabitants
  • Regulatory and zoning restrictions and challenges
  • Potentially lower resale value and decreased market appeal
  • Limited features and amenities compared to bigger homes.

ADUs also have their pluses and minuses. On the pro side, an ADU can provide:

  • More living space than tiny homes
  • Potential for rental income
  • Increased total property value
  • Flexibility for guest accommodations or multi-generational living.

However, ADUs can:

  • Cost more to build. An ADU typically costs between $150 and $300 per square foot on average, though some can exceed $600 per square foot.
  • Come with stricter zoning and building code restrictions
  • Add to your overall property maintenance responsibilities
  • Negatively impact privacy and space on your property.

Differences between tiny homes and an ADUs

As already mentioned, there are key distinctions in the tiny home vs. ADU debate that should be considered carefully.

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“Tiny homes are designed to be movable, while ADUs are permanent additions to existing properties,” says real estate agent Jim Gray. “Also, because ADUs must follow standard building codes as permanent structures, the permitting process tends to be more straightforward compared to tiny homes, which face zoning challenges in many municipalities.”

Most importantly, “tiny homes are designed for standalone living, while ADUs are meant to supplement existing residences,” says Shirshikov.

Why ADUs and tiny homes are increasing in popularity

Both of these miniature living options are gaining traction among home shoppers and homeowners thanks to their affordability, efficiency, and minimal environmental footprint.

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“ADUs and tiny homes appeal to a wide range of individuals, from retirees looking to downsize and young professionals interested in affordable homeownership to family seeking to add rental income or living space for extended family members,” Hutter points out. “Their appeal lies in their reduced cost of living and an increasing desire for simpler, more sustainable lifestyles.”

Adrian Pedraza, a licensed real estate broker and professional home flipper, agrees.

“ADUs attract those needing extra space for rental income, hobbies, or housing relatives while allowing for customized living. Tiny homes attract minimalists and people wanting mobility,” he says.

It also comes down to simple economics.

“Tiny homes can cost as little as $30,000, while ADUs average between $150,000 and $300,000 – significantly lower than median home prices in most US markets,” Gray says. “This affordability resonates with first-time buyers, retirees on fixed incomes, or anyone striving to live debt-free. This aligns with shifting values among younger generations in particular, who prioritize experiences over accumulating things.”

In Gray’s Rochester, New York, market, he’s witnessed how ADUs can provide an inventive solution for multi-generational households seeking to host aging parents or boomerang children in a separate but neighboring living space.

“The rental income potential from long-or short-term ADU tenants is another major driver,” adds Gray.

Best ways to finance a tiny home or ADU

ADUs and tiny homes can be paid for via several loan options. Consider these financing choices and their pros and cons:

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  • Home equity line of credit (HELOC). This option is secured by your home and funded by its equity, making it a good choice for homeowners. A HELOC functions like a credit card with a set limit, allowing you to withdraw funds as needed to build a tiny home or ADU. A credit score of 780 or above can get you a better rate; a minimum credit score of 620 is typically needed.
  • Home equity loan. Ideal for homeowners with ample accrued equity seeking to build an ADU on their property or a tiny home elsewhere, a home equity loan lets you borrow up to 85% of your home’s equity (minus what you owe on your mortgage loan), although you’ll need to use your primary residence as collateral. You’ll likely need a minimum credit score of 620.
  • Conventional cash-out refinance loan. If you already own a home, you could opt to refinance your existing mortgage and liquidate some of your equity so you can take out extra cash at closing. These additional funds can be used to pay for an ADU or tiny home. A 620 minimum credit score is usually required.
  • Conventional loan. Widely available with high borrowing limits, these loans offer relatively competitive rates for qualified borrowers, particularly renters and first-time buyers. However, tiny homes may not qualify for conventional mortgage loans. Generally, a home must be built on a foundation and meet minimum square footage requirements to qualify. Also, a conventional loan may have stricter credit requirements and require a higher credit score. Count on a minimum credit score of 620 in most cases.
  • USDA loan. Manufactured homes typically do not qualify for USDA loans, but a tiny home could qualify if it meets USDA property standards and is permanently affixed to real property. You could also use a USDA purchase loan to buy a home with an ADU already built on the property, or a USDA cash-out refi loan to help pay for an ADU, but USDA loans do not allow for multi-unit properties that are designed to generate rental income. Aim for a 620 or higher credit score.
  • VA loan. Veterans, active-duty military, or surviving spouses can use a VA purchase loan to buy a tiny home (even if it’s a manufactured home) or buy a property with an existing ADU if it adheres to VA property standards and is permanently affixed to real property. Additionally, you can use a VA cash-out refinance loan to assist in financing an ADU project construction. Note that VA loans do not permit properties intended for investments or rental income. Aim for a credit score of 620 or higher.
  • Personal loan. Available in amounts from $1,000 to $100,000, personal loans are flexible and typically unsecured, which means you won’t have to put up collateral. Some lenders offer fixed-rate loans specifically for tiny homes. To secure the best rates, you’ll need a good credit score (670 or higher) unless you pursue a secured loan which has looser credit requirements.
  • RV loan. Some mobile tiny homes may qualify as RVs, allowing them to be eligible for an RV loan, unless the vehicle is intended as your primary residence. You may need a credit score of 580 or above to qualify.
  • Builder/manufacturer financing. Some ADU or tiny house builders provide financing with terms and rates similar to other options, but eligibility criteria and terms vary between builders when it comes to these housing options.

Tiny home vs. ADU: Which is best for me?

Ask Gray and he’ll tell you that tiny homes and ADUs can be just right for your housing needs, but either choice demands careful consideration.

“A tiny home may be ideal for someone seeking an ultra-minimalist, mobile lifestyle who is comfortable with alternative financing routes,” he says. “ADUs, meanwhile, make great sense if you have existing land to construct on, desire supplemental rental income, or need to host multi-generational loved ones. Just be sure to account for higher upfront costs and examine your long-term needs. And ask yourself: Will 400 to 1,200 square feet still work for you in 10 years?”

Hutter echoes those thoughts.

“A tiny home or ADU can be an excellent investment for those seeking sustainable, cost-effective living options. They are particularly suitable in areas with flexible zoning laws and for those looking to downsize or generate rental income,” she says.

The bottom line: Tiny home vs. ADU

Smaller abode, yet a big decision. Should you pull the trigger on a tiny home vs. ADU?

The answer will depend on your living preferences, budget, economic and employment stability, financial goals, ability to qualify for financing, and other key factors. Consult closely with a trusted real estate agent, attorney, and personal finance expert to help you determine if, when, and how a tiny home or ADU can meet your needs and prove to be a wise use of your money.

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Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.
Aleksandra Kadzielawski
Reviewed By: Aleksandra Kadzielawski
The Mortgage Reports Editor
Aleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).