After years of writing about personal finance, I finally get to talk about the amazing power of geoarbitrage!
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Geoarbitrage means moving to a lower cost of living area to take advantage of the cost differential between your old and new home base. As long as you meet a few conditions, you can utilize geoarbitrage to greatly accelerate your wealth building and get on the fast track to financial freedom.
I haven’t written much about geoarbitrage because I wasn’t convinced that I’d ever be able to take advantage of it. Maybe I was a little bitter. But it’s amazing how things can change in just a few short weeks.
As some of you have read, I’m going to be taking full advantage of this powerful strategy in just a few short months.
Los Angeles is crazy expensive
Until last month, I’d pretty much accepted the high cost of living in Southern California as a fact of life. Los Angeles is one of the most beautiful cities in the United States, and a lot of people choose to call it home. It’s the second largest city in the US after New York City and about 12.5 million people enjoy the sun, sand, and climate. This creates a high quality of life, but it comes at a high cost.
California has some of the highest taxes in the nation, including sales tax, state income tax, property taxes, and a higher than normal capital gains taxes. It has the highest gas tax in the nation as well. All of these taxes exert an effect on the local economy, leading to higher transportation costs and higher prices at the grocery store.
After my personal finance awakening in 2018, I analyzed my living expenses and saw that I was spending around $340,000 annually. Some of these expenses weren’t really expenses at all, and instead were just some form of lifestyle inflation. The best example of this was our beach club membership, which clocked in at $900 a month. But many of these costs were higher than average specifically because we lived in Los Angeles.
Sometimes, I dreamt of taking advantage of geo arbitrage and moving to a lower cost of living area, but it never seemed feasible. I felt stuck.
I felt stuck (until I wasn’t)
Just a month ago, this was my situation: After six years of residency and another six years of an attending career in urologic surgery, I was still four long years away from vesting into my medical group’s pension plan. Over the same time period, my wife had risen through the ranks at the county museum and was seemingly enjoying a rewarding career.
My wife’s job was one that only exists in larger museums. Big museums requires big cities, so when I thought about possible future destinations, those thoughts included cities like New York, San Francisco, or Washington D.C. These are not really places where we’d be spending less money or paying much less in taxes.
Sometimes life can surprise you.
Now, we are excitedly (and frantically) planning out a big move across the country to Memphis, TN. In just a few months, my wife will be taking on a new role as director of a museum there. I’ll also be joining a new practice, where for the first time I’ll be practicing urology in a private setting instead of an employed setting. To top it off, we’ll be taking full advantage of the amazing power of geoarbitrage.
High cost of living hurts (your wallet)
In 2021, we paid $56,885 of state taxes after deductions. My wife and I are very fortunate and both earn good salaries. But $56,885 is still a lot of money to us. This amount could easily pay for a year of private school tuition, clothing, and food for our two boys. It could buy us a new Tesla Model 3. Or invested into a brokerage account, this could net us an extra $572,414 more dollars in the bank after 30 years of 8% annual compounded growth.
I don’t want to get into an argument about the necessity of state taxes, and I know that they are an important part of paying for state services. Income taxes form the majority of the money California makes from taxation. Higher taxes allows it to pay for more things like public schools, infrastructure, subsidized health care, and government employee salaries. But it’s absolutely true that other states have figured out a way to run their governments without state income tax.
Our plan was still working
Despite the high cost of living in SoCal, a few years ago I crafted a 15 year plan to financial freedom. This was fueled mainly by investing as much money into the stock market as possible. After I decided to focus more on real estate investing, my timeline sped up significantly. I was able to update the plan to get to early retirement to a 10 year plan.
This plan was coming to fruition via the power of strong incomes, active real estate investing, and the stock market. Now with 26 units of rental property and a strong portfolio of index funds, I feel that we are much of the way there. The economic turmoil of 2022 has set us back somewhat, but I think we’re still making forwards progress via dollar cost averaging.
Aside: It’s tough to know how close you are to financial freedom until you have a chance to analyze the previous year’s numbers. In any given month, we have so many moving parts in our financial lives that it’s tough to make generalizations. These might include capital expenditures for renovations or a vacation to Europe.
Geoarbitrage can get us there faster
Even though we’re making progress towards financial security despite the higher costs of Los Angeles, it’s clear to me that we’ll get there faster with the power of geoarbitrage.
After just a couple of visits to Memphis, I can see that we’re going to have a lot more free cash. Gas is two dollars a gallon cheaper. Private school tuition is at least 20% cheaper. And after a few days of house hunting, my analysis is that houses are approximately a third of the cost of equivalent houses in Los Angeles. (Yes, you read that correctly.)
My wife’s salary is largely staying the same. My income will fall this year as I spend a few months in purgatory while waiting for my Tennessee medical license. But next year, it will come back up as as I build up a patient roster and start producing good revenue for the private practice I join. Then after another couple of years, I think it’s very likely that I’ll end up with a higher income than my current income as a surgeon in California.
With continued investment into real estate and stocks, I’m fairly certain that this move will shave another few years off our journey to financial independence.
Which geoarbitrage strategy is right for you?
There are a couple of flavors of geoarbitrage for you to consider. My family will be taking advantage of “domestic geoarbitrage,” since we’ll be moving within our home country of the United States. If you decide to move to a different country, you’d be taking advantage of “international geoarbitrage.”
There are some big barriers for me to leave the country, since my medical license is really only portable within the USA. If I moved to a foreign country like Chiang Mai or some other low cost of living country in southeast Asia, I’d face a lot of challenges. I might have to repeat part or all of my residency training (as well as learn a whole new language).
If you’re in a family of digital nomads and run an online business, however, an international move might be a real option for you. You could leverage the power of the internet and remote work to live in different cities around the world. By earning an American income (in dollars) while taking advantage of price differences in different countries, you could increase your net worth incredibly quickly.
Geographic arbitrage, or geoarbitrage, is a powerful way to accelerate your journey to financial freedom. I never thought I’d be able to take advantage of its power, but I’ll be doing just that by moving with my family from Los Angeles to Memphis later this year. If we can keep our lifestyle creep in check, I’m fairly certain we’ll be getting to our financial goals much faster with this move.
It’s not all fun and games. We’ll be sacrificing the perfect weather of SoCal for the heat and humidity of the Mid South. We’re leaving behind a close and vibrant group of friends that we’ve built over 12 years in Los Angeles. We’ll continue to see these friends via travel, but it won’t be as frequently as before.
But I’m excited. Not just for the chance to finally practice geoarbitrage. I’m excited for new adventures in medicine, investing, and in life. Here’s to new beginnings!
–The Darwinian Doctor
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Good luck with the move! I am hoping you will share an update to show the differences between LA and Memphis once you have been there for a while…
I’ll put it on the list! A lot of differences are clear off the bat. It’s definitely a smaller city, with less amenities and a smaller population.
welcome to Tennessee! Im on the other side of the state, but still
Thanks very much! We’re excited to make the move.
We moved from San Diego to the Pacific Northwest 6 years ago. No state income tax and no sales tax nearby. Lower cost of living. Sure it comes at a cost since it rains a lot more here than in San Diego but is the sunshine tax really worth that much? Geoarbitrage is helping achieve our financial goals.
Great example of geoarbitrage. I’ve heard tales of this double geoarbitrage that’s possible in the Portland area. It’s a fascinating opportunity and I’m glad you’re benefiting from it!
Great news! Tennessee is a lovely state. Are your parents able to come with you too? How do they feel about the move?
Thank you! Yes, my parents are able to come with us, and I think they’re excited for the change! Due to the pandemic, they never really settled into a groove here in LA and I think a smaller city will be a really good change for them. More than the surroundings, though, they’re really dedicated to their grandkids, and want to stay close by.
Here I am plotting my return to Los Angeles. Left LA for Houston 3 years ago. Paid off all of my student loans. Bought an out of state duplex and hoping to find another property. Financially it’s been fantastic for us. I’m sure I’m making a huge financial mistake. But after 3 years of sweating to death from May to October, no ocean, I can’t do it anymore. It’s so damn hot. This post is totally making me second guess the decision. Is sunshine/good weather tax worth it?
I congratulate you on the move! I think we’re going to fiercely miss the sunshine, mild weather, and the beach. You’ve advanced your financial position wonderfully in the last 3 years, and if you want to head back to LA, go for it! What I’m learning is that no decision is permanent, and change is only a mindset shift away.
Welcome to Memphis!
We moved to Memphis (wife and two young children) in 1995 when I finished my residency and fellowship in Baltimore, MD. It’s been the best decision we ever made. It’s been a wonderful place to raise our kids, the people are friendly, and the cost of living is very attractive. I operated a private practice for many years and I’m now medical director in one of the local hospitals. There is not much managed care penetration here, patients still respect their doctors like the old days, and the private practice model thrives in this part of the country. There is no state income tax and no traffic. My wife’s parents moved here as well and they were amazed how much better they enjoyed their lives. We couldn’t be happier!
(Personal email removed for privacy)
Happy to help you any way I can.
Hello Paul and thank you so much for the kind note! We are settling in nicely to Memphis. I still marvel at the lack of traffic and the way you can get from the airport gate to the parking structure in less than 10 minutes. I’m really looking forward to practicing medicine here for all the reasons you listed. I’ll save your email!