The Finances Of Our City Rental And Country Homestead
As I shared in a fit of elation the other week, Mr. Frugalwoods and I bought our Vermont homestead!
If you want to get caught up on this breaking news, check out the first two posts in my homestead mania series: That Time We Bought A Homestead and How We Decided Our Homestead Was The One. Today, I’m addressing the financial aspects of our dream-come-true property.
Our plan, and ability, to move to the woods of Vermont is predicated upon several financial factors working in harmony:
- Extreme frugality.
- Renting out the home we own in Cambridge, MA.
- Purchasing a homestead in our price range.
- The ability to work remotely from Vermont.
- The possibility of someday generating income from our land.
- Frugal Hound’s international modeling career. Let’s be honest, she’s one fabulous looking greyhound.
Get excited people–I’ll address each of these elements in turn.
#1: Extreme Frugality
Regular readers of Frugalwoods are well-versed in our frugal weirdo style of extreme frugality, so I won’t go into depth here. In summary, Mr. FW and I have always been frugal folks and haven’t ever had any debt except for our mortgages (more on that decision in a minute).
We didn’t inherit money or receive loans or cash from friends or family–rather, we’ve been circumspect savers for most of our adult lives (while working for non-profit organizations). Additionally, we don’t ascribe to an ascetic or miserly form of frugality; on the contrary, we’re in the camp of luxurious and joyful frugality.
Prior to initiating operation move-to-a-homestead in March 2014, we were saving roughly 40-50% of our combined net income. After solidifying our early retirement aspirations, we began saving upwards of 70% of our net income (which does not include maxing out our respective 401Ks–read about the details here.).
By carefully socking away the majority of our income each year, we built quite a nest egg, which we consider to be our financial back-up. We don’t have immediate plans to draw down on these funds anytime soon. Rather, this money–which is held primarily in low-fee index funds–serves as our fail safe (interested in how we manage our money? See this post and this one too).
If we needed to, we could comfortably withdraw 4% annually from our investments in order to provide for our rather meagre living expenses. But, we don’t intend to enact that withdrawal method in the near future. We’re of the belt-and-suspenders model of early retirement–we like for our financial behinds to be well-covered. For more on the methodology of the 4% rule as it pertains to early retirement, see How Much Do I Need To Retire Early? and the academic origin for this philosophy, The Trinity Study. Sidenote: If you’re interested in kicking off an extreme frugality regimen of your own, then I have just the thing for you: take my uber frugal month challenge!
Furthermore, extreme frugality works for us in two ways: firstly, it enables us to save a great heap-o-money. But secondly, and even more importantly, it permanently lowers the amount of money we need to live on each year. Extreme frugality wasn’t a one-time stunt or gimmick for us, it’s a lifelong decision to embrace less consumption, insourcing, and a commitment to not wasting our precious resources. We adhere to the ethos of: if you don’t spend a lot of money, you don’t need a lot of money.
#2: Renting Our Cambridge Home
When we purchased our single-family Cambridge house in 2012, a driving factor in our decision was the possibility of one day renting it out. Cambridge is a super hot rental market–65.4% of all housing units are rented in the city, a fact perpetuated by the two major universities anchoring the city: Harvard and MIT.
The transient nature of Cambridge’s academic community, along with the boomlet of biotech firms now headquartered or with offices here, puts tremendous pressure on the housing market such that rental and purchase prices are ever-increasing. We feel very fortunate we were able to buy when we did as there’s no way we’d be able to afford our house in today’s market.
While we assumed that renting would be the most advantageous long-range financial decision, we had a realtor come to the house this spring to price it out for sale, just in case. It’s always a good idea to check your financial assumptions. After conducting a CMA (comparative market analysis), the realtor determined that he’d list our home for sale at $890K, which is an almost unheard-of appreciation rate over our purchase price of $466K. There’s nothing tremendous we’ve done to the home to warrant such an increase (beyond minor repairs and cosmetic changes), it’s just the nature of Cambridge’s wildly popular market.
We then had several local rental brokers assess our home to determine its rental potential. They all reported back that it should rent for between $4,200-$4,400 per month. With these two data points in hand–the potential rental price and the probable sale price–we were able to project our returns for these two scenarios. Sidenote: realtors and brokers offer these in-house estimates for free, so there’s no harm in availing yourself of their expertise.
In the short-term, selling our home would certainly provide a more massive influx of cash. But over the duration, renting should yield the more significant return. The capacity to purchase a second home without needing to sell our first was made possible by factor #1 (extreme frugality) and is an awesome benefit that many a frugal person enjoys–indeed, it’s why rental properties are so popular in the financial independence community.
The Math Behind Deciding To Rent Instead Of Sell
In making the decision to rent, we are gambling that over the long-term, the leveraged returns on our house will be better than the broader stock market. Certainly over the short-term that has held true as we put only $65K down on the house and realized an almost $400K equity increase, which is a crazy high return.
Our projections do not assume this level of astronomical appreciation (see spreadsheet at right), but even with a relatively modest level of appreciation, our return on rents is substantial and also tax-advantaged because it’s rental income.
From an appreciation standpoint, we estimate that our particular neighborhood is at about a 6.5 on a gentrification scale of 1-10 and it’s on a sharp upswing at present. Plus, the broader economic forces in New England point to this having potential for more appreciation. Additionally, renting provides us with nice diversification since the rest of our money is invested in low-fee index funds. We could diversify with a REIT, but we feel like we have a particularly good deal here and we know the area well.
Why We Hired A Property Manager
Mr. FW and I initially assumed we’d manage the home ourselves, but in the interest of doing our research, I priced out property managers just in case. Most of the PMs I spoke with charge more than we’re willing to pay for the convenience of having a local manager. But then I got a hot tip from a friend of a friend we met at a Christmas party about the PM they use in Cambridge who charges a ridiculously low flat rate per month. While researching on the internet is helpful, never overlook the power of asking real live people. You never know who might be a secret real estate maven or financial independence devotee!
I called up the PM in question and, turns out, they’ll manage the house for a cool $105 per month. Perfect. I am absolutely willing to forgo $1,260 in profit this first year to avoid middle of the night panic phone calls from tenants while we’re a 2.5-3 hour drive away. If we were living in the same city, we’d definitely manage the house ourselves. And if we were living across the country, we’d definitely get a property manager. Our distance put us firmly in the grey area and so we’ve decided to hire a PM for the first year of our landlording career and then re-assess for next year.
We’re already thrilled with our property manager as they were able to rent the house out for $4,400/month, which was the very top of the price range estimate we received from the various apartment rental brokers we polled. They took professional photos of the house (wow do they look better than my standard photography–sorry you guys are subjected to my amateur shots here on the blog!!), listed the house, brought prospective tenants through, and rented it out quickly. They also did extensive vetting (including credit checks, calling references, verifying employment, etc) of the tenants, created the lease, and will handle all aspects of the tenancy.
The income from renting out our Cambridge home will cover both our Cambridge and Vermont mortgages as well as all of our expenses surrounding the Cambridge dwelling: paying our property manager, generating a maintenance reserve, taxes, and insurance.
#3: Purchasing A Homestead In Our Price Range
One of the reasons Mr. FW and I searched for our homestead for oh so long (3+ years) is that we were committed to buying a property that fell at, or below, our price max of $400,000. Tempting as it is to stretch one’s budget with house hunting, it’s one of those times when it’s truly imperative to stay on target. Thus, we were thrilled to purchase our homestead for $389K.
It had always been our intention to get a mortgage on our homestead and so we put down 25% and got a 4% interest rate on a 30-year fixed mortgage. We weren’t able to get a rate lower than 4% because: 1) we bought it as a second home, 2) there’s extensive acreage, which makes it an unusual mortgage and hence, we needed to use a local lender. We’ll likely try to refinance once the homestead is our primary residence.
And in our opinion, having a mortgage is also about managing risk. If you have a mortgage and you have a lot of cash in the bank, you have the ability to both pay that mortgage and contend with an unexpected immediate expense. Having a mortgage reduces our risk in of future potential cash flow difficulties. It’s tough to extract liquid from a paid-off house, short of selling it or potentially getting a home equity line of credit.
Although we could’ve paid cash, it’s our belief that our funds will be better utilized invested in the market. If you’re interested in reading more about how we manage our money, check out How We Manage Our Household Finances and Why We Don’t Micromanage Our Money. Additionally, we purchased a home that’s move-in ready; thus, we won’t have to incur major renovation or repair expenses upfront (other than adding a dishwasher!)
#4: The Ability To Work Remotely
Our intention throughout our homestead-hunting process was to buy a property whenever the right one came available. Why? Because available homesteads are scarce in the areas we wanted to move to and we didn’t want to let a dream parcel slip through our fingers.
We had the fall of 2017 set as our outer limit deadline, but we hoped we’d find a place before then. Hence, we are thrilled with the opportunity we both have to work remotely from Vermont. The fiber-optic internet that our homestead comes equipped with was a gigantic factor in making us realize this parcel was the one for us. With the internet, Mr. FW and I feel we’re able to do just about anything: work, learn, create, and connect with the world.
Mr. FW is infinitely fortunate to have the ability to work remotely for his current employer, which is an ideal situation as he enjoys his job, but wants to live in the woods of Vermont. I’m now working from home as a freelance writer, a job I love and am able to do during the hours that suit me (while Babywoods naps) and from anywhere (the woods!).
Since I’m now working only part-time–as I care for Babywoods full-time–I don’t make as much as I did from my previous full-time job. But, the difference in my income is made up by renting our Cambridge home. We were essentially losing out on revenue every month that we lived in our Cambridge home. Since we were grossly underutilizing the asset as a family home, renting it out is by far the better financial decision. Plus, by reducing my work to part-time, we’re able to avoid the cost of daycare for Babywoods, which runs north of $2,300/month in the Boston area.
#5: The Possibility Of Generating Revenue From Our Homestead
I listed this component last and as a “possibility” because that’s all it is: a possible option one day down the road. Our financial projections don’t account for making a dime from our land for several reasons:
1) We’re not farmers or gardeners. Although we hope to grow our own food, make maple syrup, and harvest apples, I don’t know if we’ll ever be proficient enough to sell our products.
2) This is too variable a factor–with far too many unknowns at this stage–to deduce accurate projections.
A few of the ideas we have for perhaps leveraging our land for profit in the future include: selling a farm product (vegetables, syrup, apples, etc); building a cabin to rent out on AirBnB; Mr. FW creating furniture or art through his hobby of woodworking and welding; and selling some of our timber, which needs to be harvested anyway for the health of our forest (and in accordance with our forestry plan). While these could all someday yield income for us, our immediate plans are to get the land in shape to maintain and sustain our own little family first.
Making It Happen
It’s the combination of these five factors that allows us to swing this move financially. While we certainly could’ve jumped in with just one of two of these elements in place, Mr. FW and I are somewhat conservative in our financial projections. Although we’re both risk-takers, we like to think of ourselves as strategic and judicious risk-takers. There are a million different ways to homestead, and almost as many methods of reaching financial independence, so please don’t see our decisions as a one-size-fits-all approach.
What we’ve endeavored to do is address our financial needs from multiple angles because, one never knows exactly how the stock market or real estate will pan out. If, for example, our Cambridge house needed a new roof (ok hopefully that won’t happen soon as the roof is less than 10 years old… ) we could easily experience a net negative year. Hence, we’re not solely reliant upon this rental income.
In this same fatalistic vein, if the stock market was down for several years in a row, our portfolio could take a serious nose-dive, which, again, would be problematic if our entire well-being revolved around a 4% SWR (safe withdrawal rate). And if all of our homestead crops go belly up due to early frost/deer/moose/our incompetence, we’ll still be able to eat and afford our living expenses. By diversifying our income and our investment vehicles, our hope is that we’re setting ourselves up for long-term financial success. And if everything goes south all at once, we have cash reserves that aren’t invested to fall back on.
Finally, by maintaining our chosen lifestyle of extreme frugality, we have the comfort of knowing that we can get by on very little money indeed. And at the end of the day, that’s what I come back to–although money provides infinite amounts of security, it doesn’t equal happiness. That is for each of us to discern through our own unique pursuits and passions.