The term Geoarbitrage was first coined by Tim Ferriss, the author of the four hour work week.
But, before I knew what it was, it was something that I found interesting. The story of how I stumbled upon it was actually kind of funny (and shameful lol).
Channel flipping, I came across House Hunters International on HGTV. It was about a couple that had just relocated to Merida Mexico. The architecture looked interesting, so I stuck around to watch. Their budget happened to be less than my shabby university apartment. When I saw what they were able to afford, I was shocked. Until this point, I had never put much thought into how much housing costs in different parts of the world.
So, geoarbitrage, what exactly is it?
What is geoarbitrage?
Geoarbitrage is the process of moving from an area with a high cost of living, to an area with a low cost of living while keeping the same income. It is a combination of the words geography and arbitrage.
My example above, of the family moving to Mexico from the US is an example of geoarbitrage. However, you should know that it does not have to be an international move. It could simply be a move within your country to a city with a lower cost of living, lower taxes, or a combination of the two.
The main point though is that regardless of where you move, you should maintain your current level of income. It doesn’t make sense to move to an area with a 20% lower cost of living only to also take a 20% pay cut.
Fortunately, one positive thing that came from the 2020 Covid-19 pandemic is that employers are more favorable toward remote work. You can use this to your advantage.
Advantages of geoarbitrage
While the main advantage is a lower total cost of living, there are several other advantages to take into consideration. They include things like more favorable taxes, being able to afford a house, and fewer people.
Cost of living
If you live in a city like San Francisco, London or Paris — almost anywhere will have a lower cost of living. The benefit of living in a lower cost of living area is, assuming you’re able to keep your big city salary is that you’re able to save more each month.
This paired with a lower cost of living means that you’ll become financially independent much faster than your colleagues that choose to remain in your home city.
Taxes
I know that when most of us think of reducing our tax bill, we think of the standard tax havens like the Bahamas, Bermuda, or the Caymen Islands. While that is true to some extent, the average person wouldn’t benefit much by moving to these countries since the cost of living is quite high.
Keep in mind that you don’t need to move abroad to start saving on taxes. If you live in the United States, it can be as simple as moving to a state without income tax such as Florida or Texas.
Buying a house
In cities like New York City, Houses are nearly unobtainable for everyone except the ultrarich. Fortunately, though, the majority of the United States is quite affordable in comparison.
For less than $300,000, you can get a 3 bedroom, 2000sq ft house in Houston. If we convert this to renting, it works out to about $2500/mo. What can you get for that in your city?
Fewer people
Depending on the type of person you are, this may or may not be an advantage. But more expensive cities most likely have more people and all the negatives that come with that like crime, traffic, and the rat race. Cities with a lower cost of living tend to have fewer people and by association, little to no traffic or crime.
Types of geoarbitrage
Geoarbitrage doesn’t have to be an international move like my example from the beginning. I would argue that relocating within the same country is the most common example of geoarbitrage.
In the United States, thousands of people have been leaving California every year for states with a lower cost of living. The same can be said of New York City. Though, maybe they’re just tired of the weather. Needless to say, these are also very real, and very common examples of geoarbitrage.
Domestic geoarbitrage
Domestic geoarbitrage is the easiest way to get start taking advantage of geoarbitrage. You don’t even need to leave your city. You could move to a cheaper neighborhood, move closer to public transport routes and get rid of your car or take it to the next level and reduce your tax bill by moving to another state with lower taxes.
International geoarbitrage
Moving abroad for the sake of a lower cost of living leans toward the extreme end of the spectrum. It is no doubt, an adventure of a lifetime. Though, it takes much more planning to get right.
You’ll need to account for getting residency in your desired country so that you can live there long term. This is usually difficult — don’t let this deter you though. The benefit is that you’ll likely be able to reduce your cost of living significantly more than by staying in your home country.
How to use geoarbitrage to save more
There’s a lot of planning that needs to happen to put a geoarbitrage strategy into practice. First, you’ll need to define your goal of why you want to practice geoarbitrage, then research suitable locations, visit and make sure it’s livable for you, prepare to move, and finally — relocate there.
Define your goals
Most commonly, there are two reasons someone wants to utilize geoarbitrage. The first is people looking to reach financial independence quicker, and the second, those already retired looking to stretch their retirement savings. There are many other possible reasons, but this should be enough to get you to start thinking about your “why”.
Research locations
Next is to start researching locations. This is highly dependent on your goals and personal circumstances. For example, in some of the less developed parts of the world, healthcare is seriously lacking. If you’re retired, you’d probably want to avoid these areas.
Similarly, if you’re a digital nomad that needs to be tethered to the internet 24/7, you should look into that. A great resource to get started researching internet quality around the world would be speedtest.com’s global broadband index.
In terms of cost of living, the most accurate resource I have found is Numbeo’s annual cost of living index. You can also take a look at the Economist’s Big Mac index where cost of living is compared based on the cost of a Big Mac in each country.
You’ll also want to keep in mind the ease of getting residency. If you’re looking internationally, be sure to check that country’s department of immigration website. In some countries like Ukraine, it’s as simple as opening up an LLC.
Visit before moving
After you’ve chosen where you’d like to move, you should plan to take an extended trip there and visit for at least two weeks. Find areas of the town or city that you like and would consider living in.
There’s no quicker way to negate the effects of geoarbitrage than paying to move across the country, or worse, internationally and decide you don’t like it.
Prepare to move
If you’re making an international move, you’ll first have to get take care of residency so you can stay legally. As I said, and want to emphasize, an international move is not as easy as moving within your home country.
Also, you’ll need to arrange accommodation before your move. Decide if you will book something like an AirBnb and find an apartment or if you’ll move directly into an apartment.
You should also plan how you’ll earn an income. Are you self-employed, or planning to talk with your current employer and work remotely from your new location? This also has tax implications that will need to research.
Are you planning to move with all of your stuff? You’ll need to sort out your moving arrangements. If you are planning to move indefinitely, I highly suggest selling as much as you can because moving becomes exponentially more expensive when you’re shipping things across oceans.
Finally, move there!
Hop in your car or on the plane and get to your destination safely. That’s it. Regardless of your financial goals or reason for pursuing geoarbitrage, enjoy the process.
So, is geoarbitrage right for you?
For me, reaching financial independence is extremely important, and while I’m still single and without children, it makes sense to do everything I can to pay down debt and get ahead. I also never really had the feeling of “roots” so to say. It’s always been easy for me to move and live away from friends and family.
At the end of the day, only you can make this decision. You’ll have to evaluate your motivations, circumstances, and personal values.