[Today's post by Peter Kim at Passive Income, MD discusses a concept we often refer to around here as Geoarbitrage. Usually when we say it, we mean moving somewhere that you will either get paid more or where it will cost you less to live. This, of course, speeds you along the way to financial independence. It can also mean investing in real estate somewhere that you don't live. In this post, Peter gives his thoughts on it as someone who lives in a relatively high COA area.]
When it comes to passive income, we often discuss things like increasing cashflow, decreasing debt, and reducing spending.
There is, however, a growing movement that advises simply moving to an area with a lower cost of living. It’s called “geographic arbitrage”, or simply geoarbitrage, and it makes a lot of sense—on paper anyway. In fact, my good friend Physician on Fire is a huge fan of geographic arbitrage.
Aside from all the buzzwords that surround this concept, there are a few things to consider. But before we dive into it, let’s take a deeper look at exactly what geoarbitrage entails.
What is Geoarbitrage?
A term made popular by the author of The 4-Hour Work Week, Tim Ferris, geoarbitrage is a very simple concept. Basically, if you want to “raise” your net income, all you have to do is reduce your expenses. One major source of expenses for many people is their mortgage, their food, the schools their kids go to—cost of living expenses in general.
At first, the term “geoarbitrage” meant moving to another country altogether. Thailand, for example, has a very low cost of living compared to almost anywhere else on Earth.
Now, though, the term is generally understood to mean simply moving anywhere with a lower cost of living. As long as you keep the same amount of income, it certainly follows that your net cash flow would increase.
But does it make sense for the average physician? Well, of course, everyone is different, but there are some factors to consider.
The fact is, lowering your cost of living is never a bad thing, financially speaking. And it certainly does work for people who choose to do it.
For example, the Prudent Plastic Surgeon recently moved from Manhattan to Buffalo, which is a big enough difference that his cost-of-living index dropped by 28%—certainly nothing to scoff at.
Some people move just a few miles away, taking advantage of lower property taxes in a new place.
Whatever the case, the simple fact is geoarbitrage is effective—at least, when it’s done right.
There Are Many Factors
The idea of moving to a new area and increasing your net cash flow is certainly tempting for many. But as with anything, there’s quite a bit more to it than that, and it’s important to consider all the costs.
For example, how do you normally get to work? If you currently commute in your own vehicle, this may not be as big of a concern. However, if you rely on public transportation or ride-sharing, it’s possible that having to change your commuting habits could eat away at the money you could be saving.
Related to travel: would you have to fly more often if you moved? Perhaps to visit family or for vacation? Are there any toll roads to consider? These could also be a major impact on your finances.
Another major consideration is taxes. As I mentioned earlier, there are states with zero income tax, which can be a huge advantage. As of this writing, they are Alaska, Washington, Nevada, South Dakota, Wyoming, Texas, Florida, Tennessee, and New Hampshire. I live in a state (California) that has a top marginal rate of 12.3%. Not having to pay that tax is the same as getting an instant raise.
Of course, if none of those states interest you, it’s still important to pay close attention to the taxes of your destination. Income tax, property tax, and various local taxes can defeat the purpose of geoarbitrage before it begins.
The last big thing to think about is school. If you have kids, will they be changing from private school to public school? Or will they be going to college in the next few years? Given the cost of education, this may be the single greatest determining factor for parents.
Now, after reading through these factors, you may have noticed that they’re a bit ambiguous—neither pro nor con.
That’s because all of these factors could be cons if you’re eyeing an area that has higher taxes, more expensive schools, and less convenient transportation.
But if you find a place that has few taxes, cheaper schools, and is centrally located, it may be too good to overlook.
Do I Recommend Geoarbitrage?
It’s hard to say whether I’d recommend geoarbitrage, generally speaking. I do believe that if it makes sense for you, your family, and your career, there’s absolutely no reason not to save on some expenses by moving to a different area.
On the other hand, I think it’s safe to say that for a majority of people, geoarbitrage simply isn’t feasible.
People often talk about it like it’s a math problem. Change X to Y and you’ll have a ton more money and a better life. Unfortunately, we all know that there are a ton more factors to consider.
Currently, I love where I live. My whole family is here, as is my community. That’s something I’d have to give up or re-establish wherever I move. That’s not impossible to do. My family could move with me and we could make new friends.
But what’s that worth?
Plus, we do love the weather here and, even in this time where we’re spending way more time indoors, being able to get out and go for bike rides nearly year-round or even walk on the beach when we want has been a benefit mentally.
So is there a solution?
I think that the key is to find some middle ground. Like the Prudent Plastic Surgeon experienced, even moving within the same state can drastically reduce your cost of living. That’s what I’m considering at this point. Keep the weather, move to an area with a lower cost of living, stay close enough to my community, family, and friends.
If it’s something that could work for you, then it would be more than worth it.
What Should You Do?
Ultimately, before even considering geoarbitrage, the best thing you can do is sit down and assess your goals. Take your financial priorities into account—all your investments, income, side hustles, and expenses.
If you could greatly benefit from a low-to-medium reduction in expenses, then geoarbitrage may be just the thing for you. It’s all about your priorities and the goals you already have in place. Plus, if you decide it’s not right for you, you’ll know exactly why.
The one thing I glossed over is that the ability to make this change does depend on your sources of income. Work hard, but quickly convert that active income into passive income, and it’ll make your choice of whether to utilize geoarbitrage or not that much easier.
Whatever you decide, the important thing is to consider all opportunities, and finally, make the choice that helps you reach your goals.
What do you think? How much consideration have you given geoarbitrage? Comment below!