If you are one of the many people trying to achieve FIRE (Financial Independence / Retiring Early), then you’re probably using a number of strategies to make this happen.
You may be trying to reduce your expenses by eating out less or cutting your cable cord. You may be looking to pay down your student loans or consolidate your credit card debt. Or you may be looking for an extra few tenths of a percentage points on your online savings account for your emergency fund.
These are all good tactics to improve your finances, and we recommend you do all of them. But sometimes to move ahead faster, you need to pull a big lever instead of a bunch of small ones. The big lever we pulled to get to FIRE 9 years ahead of schedule was using “Geographic Arbitrage.”
What is Geographic Arbitrage?
Let’s first understand what “arbitrage” is. According to Investopedia:
“Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms.”
With “geographic arbitrage” the asset is your home, and the market is the location of your home. In simple terms, it just means relocating to a less expensive area. But there are a number of factors to consider: Where should you relocate? How will it affect your quality of life? Should you own or rent? Would you be ok downsizing?
Geographic arbitrage can be such an impactful strategy, because housing is usually your largest expense. If you can find a way to dramatically reduce your housing costs, it can significantly accelerate your path to FIRE.
Here are the top 3 household expenses for the typical American, according to the 2016 Bureau of Labor Statistics:
- Housing: 32.9%
- Transportation: 15.8%
- Food: 12.6%
- Total: 61.3%
For the average American, housing is about a third (32.9%) of all expenses. If you live in a higher cost of living area, that percentage can easily be over 50%.
Also note that the 2nd (Transportation) and 3rd (Food) highest expenses can be greatly impacted by where you live. Do you live in an area where you can walk, bike, or take public transportation, or you do you have to drive to your office? And are there grocery stores and inexpensive food options nearby?
Our Eureka Moment
[Please note: Our numbers are a bit higher than the average American. We live in the SF Bay Area, one of the most expensive places in the world, and we were lucky to make good money in the Internet / tech sector. That being said, you can apply the same techniques and strategies we used in most other markets -- just at different levels of housing prices.]
In January of 2014, my wife Allison and I were trying to figure out how to reduce our cost of living. We were living in nice condo near AT&T Ballpark (where the World Champion SF Giants play baseball) in a newly developing neighborhood called Mission Bay (where the World Champion Golden State Warriors will play basketball in a couple of years).
It was a pleasant place to live, but the costs were pretty outrageous. All in, our monthly housing payment was $8,360! Here’s how that broke down: $3,850 (1st loan) + $2,185 (2nd loan) + $1,400 (property tax) + $800 (HOA dues) + $125 (insurance). To save you the step of pulling out your calculator app, that’s almost $100,000 a year, just for a place to live.
Fortunately, we both had good jobs and low six-figure incomes, so we were able to make these payments, but it also meant no early retirement in the foreseeable future. Granted, we were still doing all the good early retirement activities like contributing the maximum to our 401(k) accounts, accelerating paying down our mortgage principal, and reducing expenses, but these housing costs were pretty crazy.
Initially we were going to try to stay in San Francisco and just try to find a smaller place in a less expensive area. We had been living there for over 15 years, we had friends and family there, and we both worked in the downtown area. We loved SF!
The trouble was that every decent neighborhood in SF was astronomically expensive. We’re talking $1000/square foot for a place that would need a complete overhaul to bring it into the 21st century. And we knew we didn’t want to work forever in order to pay the bank for the privilege of renting from them
So, one day, Allison had a eureka moment (the common human experience of suddenly understanding a previously incomprehensible problem or concept) -- what if we look across the Bay….to Oakland.
Oakland? Really? Yes, Here’s Why...
Oakland gets a bad rap, because it’s had some high crime rates over the years. And sure, there are some areas of Oakland that can be more dangerous than others. But, there are a lot of positives as well.
Oakland is one of the most diverse cities in the country, it’s home to a fantastic restaurant scene, it has a beautiful lake (Lake Merritt), miles of bayfront property to explore, one of the largest ports on the West Coast, and even redwood trees! It also has more BART (metro) stations than any other Bay Area city, easy access to freeways, and a ferry if you prefer traveling by boat. Oh, and the weather is much better than SF!
When you use geographic arbitrage to significantly lower your cost of living, you’re most likely going to have to make some compromises. The key is to have a good understanding of what you really need (must haves), what you would like in an ideal world (nice to have), and what you can live without (not that important).
For us, these were our must haves:
- Urban -- we liked living in a city & did not want to live in the suburbs
- Commute -- at the time we were still working & didn’t want a long commute
- Weather -- we like warm but not blazing hot temperatures in the summers
- Affordable -- relatively speaking, at least cheaper than SF
We briefly considered Berkeley, Marin, and parts of the South Bay, but, at the end of the day, the only place in the SF Bay Area that truly met all of our top criteria was Oakland.
The affordable part was the biggest factor for us. We started looking at places in Oakland online, and units that were almost identical to our SF condo were asking half the price!
Our nice to haves included things like high walkability, safe & clean, nice building & amenities, storage, good sunlight, and friendly neighbors. I have to say we were able to check off most of these as well.
Our biggest not that important was simply realizing that we didn’t have to continue living in San Francisco to be happy. If we could check off the other important criteria, then the cachet of SF living no longer mattered.
We Saved $80k Per Year by Moving Just 10 Miles!
The part of the story is a bit of a blur, because it all happened so fast. We put our SF condo on the market, and got an offer in no time. We were still looking at places in SF and hadn’t really settled on Oakland at that point.
However, once we saw the limited and expensive housing stock in SF, we realized that it was time to explore alternative neighborhoods. We also needed to act quickly if we wanted to move into a new place without having to find temporary housing that would allow us to bring our two cats.
We found three places online that looked promising, and spent a Sunday afternoon looking at the open houses. In less than 24 hours, we picked the one we liked best and put in an offer; we closed on our new condo and moved in in less than a month.
Now let’s look at the numbers. We sold our SF condo for $1,250,000, and bought our Oakland condo for $638,000. That's literally almost half the price for roughly the exact same square footage and layout. Plus, we were gaining a pool, earthquake insurance, and 24-hour concierge service. Bonus!
The kicker was that we were able to buy the Oakland condo in cash, because of the equity we had in our SF condo (plus some additional savings). So our new monthly housing cost was a mere $1,750 ($845 HOA dues + $835 Property taxes + $70 insurance). Our current yearly expenses are about $35k, which comes to $315k over 9 years.
The difference in expenses from our SF condo per month was $6,610, equivalent to a savings of $79,320 per year. Over the past four years that’s been a savings of $317,280! This basically covered 9 years worth of expenses for us, which has allowed us to retire ahead of schedule.
[Note: To keep things simple, I’m leaving out tax write-offs and appreciation. Ironically our Oakland condo has appreciated the same dollar amount as our SF condo over the past 4 years (or double the rate), according to Redfin and Zillow.]
Where Should You Move?
Perhaps you’re wondering where you could move to take advantage of geographic arbitrage for yourself. As you’re compiling the must haves, nice to haves, and not important list of criteria, here are some factors to think about:
- Weather -- do you prefer warmth year round or 4 seasons?
- Population -- do you want to live in a big city or smaller town?
- Quality of life -- how important are restaurants, walkability, crime, etc.?
- Housing cost -- what’s your upper limit per month?
- Natural features -- do you want to live near a beach, mountains, a lake?
- Culture -- do you like to go to museums, theatres, sporting events?
- Demographics -- do you want to live with other retirees or younger people?
To help you along, I’ve created the Google doc Where To Live? With data on over 45 cities around the world. It has average costs to rent a one-bedroom apartment (you can use this for reference to compare locations even if you want a bigger place), weather information, and more.
The column on the far right includes a number of resources to see city rankings, costs of living, etc. Feel free to copy this spreadsheet into your own Google Drive and update it to fit your needs.
How to Amplify the Effects of Geographic Arbitrage
As I have shown, using geographic arbitrage to relocate to a less expensive area can significantly accelerate your path to FIRE. But you can get there even faster by adding a few additional strategies:
When we moved from SF to Oakland, we bought a similar sized 2-bedroom condo. But if we could have saved even more if we moved into a 1-bedroom condo in the same building.
Many people have more space than they really need. Is it absolutely necessary to have that extra bedroom or bathroom? Do you really need a big yard? Not only are larger homes more expensive, but they also require more furniture and upkeep (which can be an additional expense).
Selling & renting:
In some markets, it’s cheaper to rent than it is to own a home, especially in larger urban areas. You saw how much our monthly housing payment was for our SF condo, especially when you add in costs like property taxes and HOA dues.
If you already own your home, you may be able to get to FIRE faster by selling it, investing that equity in stocks and bonds, and then moving into a less expensive rental.
To help you decide whether renting or buying is better for you, try a Rent vs Buy Calculator.
Sharing your space (aka "House hacking"):
Although not for everyone, if you’re willing to get a roommate, it will obviously cut your housing expense. It can work well if you have a lot of space, enjoy living with others, and feel comfortable with your roommate.
Some people even rent out rooms in their home on sites like Airbnb. This can be quite lucrative, since you can charge more for short term rentals. But of course you’re taking a bigger risk by allowing strangers to stay in your home.
With any shared space arrangement, just make sure to check local ordinances and get things in writing (rent amount, due date, house rules, etc) to reduce the chances of any potential problems ahead before they occur.
And if you really want to get the most bang for your buck, you can incorporate two or more of these strategies at the same time. For instance, you could relocate to a less expensive area AND downsize to a smaller place. It all comes down to what you’re comfortable with, what your must haves are, and how quickly you want to get to FIRE.
So, what’s next for us? We’ve been in our Oakland condo now for over four years, and so far we really enjoy living here. The weather is great, the people are super friendly, and there are all the restaurants, cafes, and breweries you could ever want in walking distance.
That being said, we are always on the lookout for additional ways to sock away more retirement money. And we are very adventurous and love to travel so that we can explore new places and living situations.
We will most likely opt to sell and downsize into a rental in the next couple of years. This would free up a lot of equity and give us more flexibility and freedom to travel.
As for relocating, that’s also a possibility, especially since we live in such an expensive area. We’ll see, but perhaps we’ll be writing from Denver, Portugal, or New Zealand in a few years!