[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.
It certainly doesn’t make sense for everyone, but if you live in a high-cost-of-living area (like I do), you’ve probably looked over your finances and wondered if picking up and moving to the midwest wasn’t such a bad idea after all.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.
Geoarbitrage Works
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.
It doesn’t have to be a major move, either. Moving across state lines can be a huge benefit. For example, Florida has no income tax, so your income could go a lot further without technically changing at all.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!
Thanks for the shout out PIMD!
I agree with you completely. Geoarbitrage can and does work but has to be right for you. In my case, it has made a huge difference despite staying in the same high tax state. But I was moving home near family and my wife and I were both taking great jobs that were long vetted. I would have a much tougher time moving to a no tax, LCOL state that was far from family.
I do think it is something that docs should think about though. Especially at the point of finishing training and taking that first job. Not the most important factor but a factor nonetheless.
Thanks again!
My Dad introduced me to the idea. He was living in Key West Florida. He owned a 6 unit owner occ apartment building and drove cab. He made around a grand a week, saved up, then went and spent a few months in Costa Rica. The apartment building cash flowed enough to survive while he lived over there like a King for a couple grand a month. Then he discovered Thailand, and finally Cambodia. My wife and I deliberately migrated from my landscape business to rental real estate for this purpose. We plan to go slow but I see us having either a small home or condo OR just rent super cheap year round, so it’s available whenever we want to get away. (I am emotionally predisposed and attached to owning but renting might just make sense. MUCH easier to change location)
We accidentally Geoarbitraged thanks to the Army. We settled down in an exurb in ‘UCLA’- upper corner of lower Alabama- and have had cheap property, lower property and income taxes with no taxes on government pensions, lots of sunshine, ability to cheaply live my desired “homesteading” dream very close to most amenities and even in a modern type house, and relatively cheap labor and some services when needed. Drawbacks: very high sales tax on everything including groceries, expensive utilities, never any snow (gardening here is a big change, losing many plant types though gaining many others), no cable TV or Internet, every flight has at least one stop over unless we drive a few hours first, no nearby relatives (and during a challenging dual career with kids life no built-in support), local politics can be demoralizing and/or a labor intensive hobby, few people of similar religion/ values/ habits/ beliefs, and therefore fewer people with whom we are sympatico and more interactions with people we find abhorrent and vice/versa.
It is certainly a big part of the reason we have achieved FIRE (yesterday I officially started a second try at retirement). The main reason we remain is inertia, continued uncertainty (he wants coast, I want where the kids are) about where we would move if we did, a kid within a few hours drive and another not yet out of school.
It has certainly been valuable for the financial gains and the education; both for us and the kids about a different area. It is even more mind-expanding than our overseas tours since we had not recognized how big the differences are within the United States.
I do not regret it, though it is certainly true that the more choices you have the more difficult it is to decide. I also doubt that either of us would have found jobs in medicine anywhere that would make us wish to work longer than we have; as in the credit card ad, early retirement: priceless.
Congratulations on your next retirement! (I failed miserably at early retirement, but still won the happiness lottery by figuring out that part-time was my “sweet spot”.)
Re: Geoarbitrage – people often focus on just one thing (like state income tax) and forget “the other end of the stick” that you pick up with that – you may get a higher state sales tax, or fewer services provided by the state, etc. It is very individual if a particular move will work for someone emotionally and financially. Looks like you made the tradeoffs that worked well for you!
We are FI and happily living in a high cost area (Montgomery County MD) close to our kids and siblings, easy drive to 3 international airports (we WILL travel again – I swear it!!!) with great state and county services, amazing public schools, and easy to find our ‘tribe’ of friends, etc.
Make sure the plan is tax tested!
Those working in NH and commuting into MA on the surface could save the 5.1-ish% State tax in MA. However you’d be wrong.
MA passed a ‘commuter tax’ taxing those travelling into MA daily.
Currently there is a lawsuit – sneaky MA was collecting the tax during the pandemic even though 80% of those travelling were working from home for most of 2020.
My point – do your homework – taxes are nuanced and this can work for or against you.
JustSayin
Top marginal income tax rate in California is 13.3%, not 12.3%.
Having come from the Midwest originally I am often reminded of the quote from the princess bride…
Westly: “A few more steps and we will be safe in the fire swamp”
Buttercup: “we’ll never survive [with our will to live intact]” (edit mine)
Westly: “you’re just saying that because no one ever has”
Hope I didn’t trigger anyone with my little joke. I actually love a lot of things about the Midwest and I talk to my wife about moving back as I could be FI in a couple of years if I sold my house here and bought a comparable one there.
The truth is most docs could be FI in less than 5 years out of residency if they moved to Guatemala or similar. It’s just not worth it to most. I’m sure many feel similarly about living in certain locations in the US.
I think the biggest geoarbitrage factor for myself is real estate. I now have about 1.2mil in equity in my house which is useless in my current HCOL area.
I wouldn’t call it useless. It eliminates your rent in a HCOL area.
Unfortunately I’m stuck in NJ because bought a $1.2mil house before I was financially literate. Been there five years and unfortunately house only appreciated $35k. paying 40k state income tax a year. Because of the round trip cost of buying and selling this house would be about $180,000, it doesn’t make sense to try and geoarbitrage as would take a few years just to break even. And that is assuming we could match the high salary here in NJ after 10yrs in practice.
So here I am, stuck, bleeding $40k a year in a cold, polluted state. I wish I had been financially literate before I had bought the house so I could have made a more informed decision about staying here. Not only would I be a few years in the financial hole if I move to Texas or Florida, but I have made a career here with its commensurate higher salary and have 2kids and friends where I have built a nice community. Too late for me to do geoarbitrage 🙁
Florida
7 years to first million
3 years to second million
Swimming in December outside
Enough said
We have FIREd to Florida and my wife loves it, but my counter to the winter (which is very nice) is summer (there is no spring or fall). Over 90 degrees with high humidity from April to October. And the traffic is really bad. And all the damn tourists! Of course they are the reason we have no income tax. I could go on.
I do agree with looking at the whole situation before making the plunge. A great vacation spot is not always a great home.
You’re forgetting a major factors in geoarbitrage: culture and ethnicity.
For example, moving to Utah is a piece of cake if you are a white Mormon. However it is much harder if you are Asian, Hispanic, African American, or well, anyone else. There will be fewer people who have similar cultures and identities. Consequently it will be harder to establish yourself within a new community.
Not sure moving to Utah saves you much money these days. The cost of housing is rapidly rising here.
Utah is growing faster (good job market, great outdoors, reasonably good weather) than any other state so it is becoming more ethnically, culturally, and religiously diverse all the time. For example, Salt Lake is considered the “7th gayest city” according to this article: https://www.bostonglobe.com/lifestyle/travel/2017/07/13/welcome-salt-lake-city-america-super-gay-super-cool-hipster-haven/Z7c6gkIeTDLaDBYLXgCgeJ/story.html#:~:text=Regardless%20of%20your%20preferred%20interjection,Los%20Angeles%20(4.6%20percent).
But Salt Lake and rural Utah are pretty different places.