Frugal Homestead Series Part 2: Here’s The Budget
Greetings frugal friends! This is Part 2 in our Frugal Homestead Series, which explores the finer points of how we’re going to reach our version of financial independence and move to a homestead in the woods in 2017 at the age of 33. Mrs. Frugalwoods and I plan to buy 20+ acres of wooded land, likely with an existing home and outbuildings, in rural southern Vermont.
In The Frugal Homestead Series Part 1: Why The Woods?, Mrs. Frugalwoods discussed the origin of our homesteading aspirations and answered the question of what makes two young, urban hipsters who’ve lived their entire lives in cities and suburbs decide to up and move to a rural plot of land. If you haven’t read Part 1 yet, you might want to check that out first.
Today in Part 2 of the series, I’m addressing our projected homestead income and expenses, and demonstrating our diversified plan for revenue generation starting in 2017 when we’re homesteading it up.
Mrs. Frugalwoods and I made a decision early in our homestead planning process to not depend on farming-related income. Why? We’re not professional farmers, foresters, or ranchers. Neither of us grew up on a farm, has any agricultural economics training, or has ever worked on a farm.
Basically, we have no idea what we’re doing.
But that’s OK. Our plan is to have the financial freedom to pursue our diverse interests without the burden of needing to do anything other than break even in the early days. In the world of startups, you could say we’ll have a lot of “runway.”
We can sail along on fine financial footing until one of our nascent ventures takes flight… or doesn’t. To give you a taste of those future ventures, they include such things as: woodworking, forestry management, and possibly a small-scale agricultural pursuit like artisanal mushrooms or some such. But, again, since we don’t need to churn a profit from any of these endeavors, the pressure is off while we work out the kinks. And, since we won’t be touching our savings or investments, we’ll have a sizable cushion against future emergencies or alterations to our vision.
We’ll both be quitting our traditional 9-5 jobs before decamping to the homestead, so these revenue models are what help us sleep at night.
For us, that’s what financial independence is all about: the freedom to pursue our varied interests without the need to make a full-time salary.
So what’s the plan? Well, let’s begin with our expenses and anticipated revenue.
Projected Homestead Budget:
For the expenses section, we took into account expenses that we don’t currently pay in our city life. For example, on the homestead we’ll use more gas, buy more tools, and need to pay for ACA health insurance.
For reference, our living expenses (everything but the mortgage payment) in December 2014 were $1,640. But in October 2014, they were $995. In all of 2014, we averaged $1,300 per month of non-mortgage expenses.
Did you catch the glaring omission in the homestead expenses category? Yep, rent/mortgage is missing because we intend to pay cash for the homestead property.
If we can coerce a bank to finance at a decent rate, we’d certainly be open to it… but so far, banks have quoted us terrible rates (6%+). Since we have enough cash on hand to buy a property outright (thanks to our 71.4% savings rate), we’d rather pay cash than finance at an awful rate. Banks don’t like weird rural properties, and I’m sure you’re not at all surprised to hear that Mrs. FW and I only like the weird ones!
Overall, this budget is looking good to us–we’ll be bringing in more than we’ll be spending, without touching a dime of our savings and investments. According to this budget, we’re even projected to save $10K/year, which is a fabulous buffer!
Also note what’s not on the list: any income from our saved pre or post tax savings. The safest withdrawal rate of all is 0%, and that’s our current projection.
Let’s take a look at each revenue line item:
1) Passive Revenue: Cambridge House
A major pillar of our homestead budget is the rental income from our current house in Cambridge, MA. When we bought the house in 2012, we had in mind that it would be an eventual rental. The location is ideal (walking distance to both Harvard and MIT) and it has 4 bedrooms plus two studies (could be 6 bedrooms for the non-discerning student). In other words, it’s perfect for the college town rental market!
We project we’ll net $8,992 from this rental in 2017, which will be our first year on the homestead.
How do I know how much we’ll make from the rental? I present to you a model:
Cambridge House Rental Projections
All of these numbers are actually quite conservative. If we were to list this house on the rental market today, we’d ask $4,000/month and would likely get it. Rents in Cambridge have increased by 6% a year for the past several years and show no signs of slowing down. To give you a sense of just how robust the rental market is: 65.4% of the housing units in Cambridge are rented.
The maintenance line item above is a complete hypothesis, but it seems reasonable. The house is rather simple and lacks complicated systems with the potential to break. It has no yard to maintain, a new roof, and invincible asbestos siding. The only system that’s on the elderly side is the boiler, but we’re told it’s in good condition for its age, plus the pumps are new.
That vacancy rate line item is equal to 15 days per year for the property to be vacant. In reality, it’s very uncommon for decent properties in this area to be vacant for more than 1 day per year. In Cambridge, the standard move dates are move out on August 31 and move in on September 1.
A note on returns: Mrs. FW and I put $60K down when we bought the house, so we’ll hopefully realize a 14% cash on cash return in our first year of landlording. If it turns out that we can achieve that rate of return consistently, the house will be worth keeping as a rental. If that rate of return is wildly over-optimistic, we’ll retain the option to sell the house without paying capital gains tax until 2020 since we’ll have lived in the house until 2017 (the capital gains tax exclusion applies to a home you’ve lived in for at least 2 of the last 5 years).
Also, we fully recognize that a rental is not a truly passive income stream. Since we’ll be serving as property managers (and cleaners in between tenants), we anticipate needing to drive down to Cambridge periodically to fix and/or check on things.
2) Active Revenue: Yurt on the Homestead
A yurt?! Well, we’re using “yurt” as a placeholder for “interesting AirBnB property on the homestead.” Yurt is just way more fun to say!
We project we’ll net $22,077 from our AirBnB property.
Over the years, Mrs. FW and I have stayed at some pretty great AirBnB properties (including an actual yurt!). We’ve always interrogated the owners about how the business operates and we’ve discerned what makes a successful AirBnB property:
Proximity to urban centers with wealthy travelers. Southern Vermont is the beneficiary of tourists from both the Boston and NYC metro areas.
- In a region known for tourism. Southern Vermont is renowned for fall leaf peeping and apple picking, winter skiing, summer hiking, and spring maple syrup. There are also wineries, antique shops, and art galleries in the region.
- Useful location not too far off the beaten path. Our future homestead will likely be within 40 minutes of the nearest medium-sized town.
- A unique component that catches the eye while browsing AirBnB. Like a yurt with a complimentary greyhound!
- Generous service that anticipates guests’ needs and then gets out of their way. Homemade Frugalwoods bread, anyone?
We think we can make those elements work on our future homestead property and the financial returns are hard to ignore. Here’s our AirBnB model:
AirBnB On The Homestead Revenue
Coming up with this model was tons of fun. I programmatically scraped AirBnB for rentals in the southern Vermont region and built a database of properties and rates. I also collected utilization information using their unpublished (but fairly obvious) booking API.
The revenue numbers above are a conservative guestimate for our future property. I was shocked at the relatively high rates of utilization (this is normalized over an entire year’s worth of data) and the going rates are actually higher than I’ve included here.
I’m theorizing there’ll be a ramp up period of 6 months to a year where we’ll need to compete more on price in order to obtain good reviews before we can raise prices to the going market rate. I’m currently tracking a few newer AirBnB properties that will hopefully help me quantify that startup period.
The expenses for the yurt are a best guess. Who knows if most of those things are accurate, though I imagine the only way to really know is to do it for a year and track carefully. However, based on my research, I don’t think they’re perilously off base.
Not included here is the cost of building the AirBnB property. That’s because the cost will vary dramatically based on what we have to work with on our future homestead. Some places we’ve looked at have a building that could work as a rental with very little renovation work. Other places, we’d need to build a yurt from scratch.
Nice, large yurts run about $15,000, with probably another $10K for site work. We can put real numbers on this once we decide on a homestead property. But with a net revenue of $22K per year, I think we’ll see a decent return.
3) Active Revenue: Other
Blog revenue and consulting revenue are estimates at this stage of the game. I’d feel irresponsible if I didn’t project something here, but I have little basis for coming up with what a reasonable number will be in 2017.
We project we’ll net $18,000 from the blog and consulting revenue.
The blog currently brings in peanuts (Frugal Hound wishes they were literal peanuts!) since we’re not into plastering it with ads or selling a bunch of stuff we don’t believe in. I mean, this is a frugality blog after all!
But, if Frugalwoods traffic continues to grow as it has over the past 9 months (thanks for reading!) the peanuts will likely grow commensurately. I’d be surprised if we weren’t making $500/month after 3 years of constant blogging and hustling. Mrs. Frugalwoods is also a freelance writer (you can hire her!) and her freelance income will be included in “blog revenue.” We’ll just have to see what comes our way!
Consulting represents the likely long-term contract I’ll have with my current employer after I quit. I respect my employer and I’d never want to leave them in a lurch. Based on my institutional knowledge (the company is only 10 years old and I’ve been there for 8 of those years), I imagine they’ll want to pick my brain from time to time, and the consulting line item is a lowball stab at what that might look like. It’s quite likely that it’ll be (much) higher, but I like to remain conservative in all of these projections.
4) What About Our Savings and Investments?
We have substantial savings and investments that we could live off of, but as this budget demonstrates, we don’t forecast needing to tap into those sources. Our investments will serve as a comfortable buffer in the fist few years as we figure out the vagarities of our budget and life on the homestead.
Homestead Expenses: A Big Bunch of Guesses
For our future homestead budget, I’m using that as a base and assuming we’ll spend more on the homestead. Some of that is obvious, like cell phones (our respective employers currently pay for them, and we’ll need to pay for them on the homestead). Same for health insurance (looks like we’ll qualify for ACA subsidies).
But other additions are conjectures based upon the realities of living in a rural area. I’m assuming we’re going to spend $150 more in gas per month than we currently average. That’s a lot, but we don’t drive very much at present.
I’m also going out on a limb (hah, forestry, get it?!) and figuring that we’ll need to buy additional tools and parts for the sundry projects we’ll have going. This will be more at the beginning as we build up our workshops, but I’m projecting it’ll average $100/month over the long term.
Taxes are relatively straightforward assuming our revenue numbers are solid. Paying both sides of self-employment taxes is tough, and really dwarfs the actual income tax at the levels we’re expecting. Wouldn’t have surmised that without gaming it all out!
Why These Projections Matter
If you couldn’t tell, Mrs. Frugalwoods and I are epic planners. These models have undergone countless revisions over the past few years, and I’m sure they’ll be revised many more times before we actually make our homestead move.
I’m also certain that the reality of living on the homestead will only barely resemble the neatly organized categories and carefully projected totals that we have above.
Despite their myriad imperfections, these models give us something to work off of, and a way to gauge our margin of safety. If we’re deviating significantly from this budget after a few years on the homestead, it’ll be a wakeup call for us to figure out new ways forward.
And with that, I conclude the second part of the Frugal Homestead Series. Next up in the series: why did we choose Vermont? Want to make sure you’re among the first to receive Part 3 delivered hot and fresh to your email machine? Sign-up in the Frugal Hound email box below and she’ll send you a message.
Do you think our budget is reasonable? Are we missing anything major?
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