How we used geographic arbitrage to pursue our dreams (and enrich our lives)

Howdy. My name is Michael Robinson. While J.D. is visiting Europe with his cousins, I volunteered to share how my wife and I have leveraged the power of geographic arbitrage to pursue our dreams — and to build our wealth.

Geographic arbitrage means taking advantage of the differences in prices between various locations. You earn money in a stronger economy (San Francisco, maybe, or the U.S. in general) and spend it in a weaker economy (South Dakota or Ecuador, for instance).

Geographic arbitrage is a powerful tactic worth considering if you want to increase your saving rate so that you can better pursue your financial goals. Several times over the course of our lives together so far, my wife and I have managed to unwittingly stumble upon the benefits of geographic arbitrage.

If you've ever chosen your vacation destination based on how strong the country's currency is — opting to visit England when the pound was weak, maybe — then you've practiced geographic arbitrage.

Today, I'm going to share three examples of how the concept has impacted our lives and helped us to achieve financial independence at 33. I hope these examples will spark some ideas for how you might be able to leverage geographic arbitrage along your financial journey as well.

About Us

I met my wife Ellen in Cuernavaca, Mexico in 2004. We were both studying Spanish at the same language school.

I was there to earn the last few credits I needed to complete a minor in Spanish. Ellen hoped the months of Spanish immersion would help her land a job as a bilingual elementary teacher in the Pacific Northwest.

Despite Ellen’s intention to avoid befriending any native English-speaking gringos like me, we hit it off right away and quickly became close friends.

As our months together in Mexico wound down, Ellen’s efforts paid off and she was hired by a bilingual elementary school in Shelton, Washington. I graduated and was offered a position as an international sales manager.

Ellen and I started a long-distance relationship that summer and I moved out to Washington to join her as soon as I could.

Michael and Ellen, hiking

Losing One Income Without Noticing It

Our first experience with geographic arbitrage was unintentional. We didn't even realize what we were doing at the time.

After Ellen’s first two years as a bilingual teacher, she asked her principal for a one-year leave of absence so she could return to Mexico and further improve her Spanish proficiency. Her principal agreed and we packed up and headed to Guadalajara for the 2007-2008 school year.

Although we lost Ellen’s annual $30,000 salary, we didn’t feel it much because our cost of living was considerably lower during that year in Mexico.

Our apartments in Washington had each cost us $800-$900 per month. In Mexico, we were able to find a suitable apartment to share for around $400 per month. Groceries and other goods and services were all also considerably cheaper.

Geographic arbitrage allowed us to maintain our standard of living in Mexico despite the loss of one income.

Taking Advantage of Taxes

During all of our highest-earning years, Ellen and I happened to live in Nevada, Washington, and Texas — all locations without state income tax.

While avoiding state income tax is obviously appealing, these states make up for that lost revenue by increasing taxes in other areas.

  • Nevada: There is no personal or corporate income tax because the state collects billions of dollars each year in the form of gambling taxes and fees. While we lived there, I gambled with exactly $0 of my money, avoiding this tax altogether.
  • Washington: Here we had one of the highest sales tax rates in the country (8.88%) and high gas prices on account of higher gasoline taxes. While we lived there, we didn’t consume a lot compared to most households, which lowered our sales tax burden. I also worked from a home office and Ellen taught at a nearby school so we didn’t really use inordinate amounts of gasoline either.
  • Texas: Here we also had a high sales tax rate (8.25%) and lived in the state with the fourth-highest property tax rate in the country — incredibly, we owed over 2% of our home’s value every year in property taxes! In Texas, we maintained our relatively frugal lifestyle, again reducing our exposure to the higher sales tax burden. And although we were pre-approved for an inexplicably high $750,000 mortgage in 2007 (on our two five-figure incomes no less!), we chose to instead take on a $100,000 mortgage and buy a starter home less than a mile from the office where we knew I’d be working.

We moved to Colorado in 2016, the same year we both stopped working full-time. This is the first state we’ve lived in together where we’ve been charged state income tax (a middling 4.63%, the 23rd-lowest in the country). But we have low property taxes and the lowest state sales tax in the country (out of states collecting sales tax).

Although we're now paying state income tax in Colorado, our earned income as early retirees is predictably the lowest it’s been in our fourteen-year relationship.

And although we’ve bought a home that cost us almost three times as much as what we paid for our Texas home, we’re actually paying less each year in property taxes.

Bonus fact for money nerds!

For anyone curious, here’s the complete list of states with no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Note, however, that while New Hampshire currently charges no state income tax on earned income, it does tax investment income.

Also, Tennessee currently charges no state income tax on earned income, but does tax some dividends and interest income. However, Tennessee has announced plans to phase out state income taxes altogether by 2022.

Making Money with Airbnb

Our most recent experience with geographic arbitrage was more deliberate.

When we learned that 31 October 2016 was going to be my last day of full-time work, it didn’t take us long to devise a plan to return to Latin America, this time with our two young children.

In our research, we quickly discovered The Earth Awaits, a useful tool for comparing the crime statistics, pollution levels, and cost of living of various cities around the world. (Get Rich Slowly reviewed The Earth Awaits last year.)

The Earth Awaits

At the time, Cuenca, Ecuador was the only Latin American city in their database that had earned the designations “low crime” and “low pollution”.

Since we were traveling there with a nine-month-old and a two-year-old, those seemed like great characteristics to us! We did some additional research on similar tools and local expat forums, and only became more and more interested in visiting the city.

Here’s a short promo video showcasing Cuenca and the surrounding Andean mountain region.

Shortly after we decided to spend our first winter in Cuenca, I had another ambitious idea.

I felt it would be wasteful for our house to sit empty for three months while we were traveling, so I proposed to Ellen that we experiment with hosting our home on Airbnb while we were away.

She was resistant at first, and rightly so. It was going to take a lot of work to get our home ready and sort out who would manage everything while we were away, among other things.

But she came around to the idea and we gave it a go. We've discussed our Airbnb hosting experience in more detail in the following articles at our website, and we've done a fair amount of Airbnb hosting since.

We were very impressed with the success of our Airbnb experiment. Our home’s first ever booking was $1,890 for 8 nights!

While we choose not to publish our net worth and our monthly expenses in dollars for personal reasons, I’ve prepared the following chart to illustrate the impact Airbnb had on our financial picture while we were traveling.

Robinson income and expenses

Let's look at these numbers:

  • Expenses: Our standard monthly expenses are represented on the chart as 100%. We’ve been tracking our expenses in Mint since 2008 and Personal Capital since 2013. Before that, I tracked another decade of our expenses in desktop budgeting software. So we feel pretty confident in our understanding and control of our monthly expenses.
  • Traveling Expenses: This shows approximately how much our monthly expenses dropped during our 6 months (two winters) in Cuenca.
  • Potential Portfolio Income: This shows our safe monthly spending level should we live solely off of our investment portfolio per the 4% rule.
  • Uncommon Dream Income: Although neither of us work full-time, I enjoy doing a day or two each week of consulting and we earn a small amount of income from our blog.
  • Rental Income: This represents the monthly income we’ve been able to earn through Airbnb while we’re traveling.

In case you missed it, let me draw your attention to an important point: Our monthly expenses while we were living in Cuenca were actually lower than our monthly Airbnb income.

So, if we hadn’t spent over a decade accumulating a portfolio of assets that could cover our living expenses, and if we weren’t continuing to earn any income, our Airbnb rental income alone still could have covered our cost of living abroad!

This actually exceeded my own expectations for our Airbnb experiment.

I also need to point out that we prioritized paying off our first home during the 2008-2009 recession. And we haven’t carried a mortgage since. The potential is certainly magnified by the absence of a mortgage.

But even homeowners with a mortgage or renters may very well be able to cover their housing related bills this way, freeing them up to more affordably slow travel.

If you're interested in becoming an Airbnb host, you can sign up with this link.

Closing Thoughts

When I ask people what they would do if money weren't a factor, traveling abroad often makes the list. While travel is a common desire, everyone’s specific motivations vary.

Some dream of learning another language while others are drawn to an area’s unique geographical features. Still others seek to experience life in a radically different culture.

For most of us though, money is a factor. But that’s no reason to give up on the dream of traveling abroad. Living costs around the world vary tremendously and many great destinations are quite affordable.

We’ve met a number of people living abroad who fund their overseas lifestyles in creative ways. Some live on personal savings while others rely on income from rental properties back home. Some work remotely while others find local work. A few of our expat friends have even started companies abroad.

If travel is a priority for you, don't let your current financial situation act as a barrier. Get creative. Use tools like The Earth Awaits to discover affordable places to live. Leverage the power of geographic arbitrage to pursue your dreams!

More about...Travel, Retirement

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Joe
Joe
1 year ago

Great job making it work! I’m jealous of your no state income tax working history. We lived in OR for the last 20 years and the income tax sucks, 10%. I’d rather pay high sales tax than state income tax. We don’t buy that much so high income tax state like OR is a raw deal. Oh well…
I guess you have a property manager for the Airbnb experiment. That’s great. I want to do that soon too. I’ll drop by your site to learn more.

Michael Robinson
Michael Robinson
1 year ago

Thanks, Joe. We do have a property manager while we’re away. She and her partner are great! A friend stayed in her nearby tiny home one weekend and she happened to be there doing some work on her property. They got to talking and my friend learned that while she currently has one tiny home, she dreams of developing an eco-resort with numerous tiny homes and managing it full-time. We later learned she lived half a mile from our house so I reached out to see if she’d be interested in managing our place and, luckily for us, she agreed.… Read more »

FoxTesla
FoxTesla
1 year ago

Clarifications on the sales tax: I’m assuming those are the combined rates, and not just the state portion. For example, with Texas, the maximum allowed sales tax rate is 8.25%, with 6.25 going to the state and local taxing authorities having the ability to collect the additional 2. Property taxes – did any of the locations charge property taxes on personal property, i.e. vehicles/boats/RVs/etc.? When I first moved to MO from TX (and SD before that) and told my coworkers it was the most expensive place I had ever lived, they looked at me like I had two heads. Once… Read more »

Michael Robinson
Michael Robinson
1 year ago
Reply to  FoxTesla

Yes, these areI combined rates. I lived in two suburbs on the north side of Dallas and, in both cases, my combined rate was 8.25% (the maximum possible in TX as I understand). But, to your point, other jurisdictions in TX have slightly lower combined sales tax percentages.

J
J
1 year ago

Shoutout from Lacey, WA! Yes, the sales tax isn’t great but I still prefer it over income tax (motivation to earn AND to save!).

Michael Robinson
Michael Robinson
1 year ago
Reply to  J

Lacey! We also lived in Olympia during our years in the Pacific Northwest. What a beautiful part of the country!

Frank Lessa
Frank Lessa
1 year ago
Reply to  J

As a poor person, I find an old cliché applies “The Poor Pay More” (e.g. if you live in a food desert you pay a lot more for food; I pay more to rent a room than my local friends pay to own houses). I figure it is bad enough that I have to pay more than the middle class for many things and therefore I’m unwilling to pay a (sales) tax penalty on top of that.

Mike
Mike
1 year ago

Great article Michael! Geographic Arbitrage is a powerful way to expand your perspective while lowering your spending (and often improving your quality of life) – I see a lot of people using this going forward (especially if health care isn’t properly addressed in the US). I also dig the airbnb aspect – I just bought a unit and I will be kitting it out in January – might ask a few questions once we get closer to launching if you have the time. Back to the article – what was the biggest “positive” surprise you found living in Ecuador? Thanks… Read more »

Michael Robinson
Michael Robinson
1 year ago
Reply to  Mike

Hey Mike! Sorry I missed responding to your comment before. If you see this, how’s your Airbnb experiment going? And I loved Cuenca, Ecuador! There were so many positives, but the one I keep coming back to is the 4 rivers through the city. There’s a lot of trails, parks, and other green space alongside them. We walked alongside the Rio Tomebamba 4 times a day when dropping off and picking up our kids. We’d often just take little breaks in a shady spot along the river and let the kids be kids, throwing rocks and sticks into the river… Read more »

Early Retirement Dude
Early Retirement Dude
1 year ago

Much obliged for the mention…

Trippe
Trippe
1 year ago

I know people in south GA who drive across the line to FL work because it has no state income tax.

Michael Robinson
Michael Robinson
1 year ago
Reply to  Trippe

Vancouver, WA is an interesting spot for that reason too. There’s no state income tax in Washington and just across the river you find no sales tax in Portland, Oregon.

KiwiGirl
KiwiGirl
1 year ago

Hey, I actually did this! How exciting. 2 years ago I reached FI and last year I moved home from LA to New Zealand. Technically NZ is actually more expensive than the US (housing, a bane everywhere) but I am getting an added boost from the exchange rate. Also healthcare is free now.

Michael Robinson
Michael Robinson
1 year ago
Reply to  KiwiGirl

Congrats, KiwiGirl. Thanks for sharing your experience with this concept as well.

Jim P.
Jim P.
1 year ago

Love this post! Thanks for taking the time to put together such a comprehensive resource.
I sometimes dream about doing this with our Brooklyn apartment, but convincing the wife is my biggest challenge. She’s steadfast that even if we were to relocate for jobs, that she doesn’t like the idea of someone else staying in our place. Going to forward this to her now… 🙂

Michael Robinson
Michael Robinson
1 year ago
Reply to  Jim P.

Thanks and good luck, Jim. Ellen was pretty hesitant initially as well. We’ve had dozens of groups through our home over the years now without issue so we both feel quite comfortable with it now. We require a large deposit so guests are quite motivated to ensure they take good care of our home during their stay. If you guys ever do start hosting on Airbnb, I’d love to hear about it.

olga
olga
1 year ago

Unrelated to the post (good job on that), but the add at the bottom of the page makes me not want to scroll down at all, even if it’s technically easy to clock on “X” corner to make it go away. I gave up many websites just because of that, and would really hate to not read GRS for this silly reason. I know one reader lost is no big deal, but figured I’d chime in (I followed this blog since inception).

CalLadyQED
CalLadyQED
1 year ago
Reply to  olga

Way to go speaking up, Olga. Those ads are annoying.

David@Fiology
1 year ago

Michael and Ellen,

Thank you for sharing your story. There is a lot to consider. There are many similarities, the differences being that you’ve actually done much of what I plan to do when FI. I’m looking forward to meeting and talking with you at CampFI Southeast in January!

Michael Robinson
Michael Robinson
1 year ago

I’m looking forward to meeting you as well, David!

CalLadyQED
CalLadyQED
1 year ago

Have you considered the damage one can do to a local economy by driving up prices and creating upheaval in the supply and demand equilibrium by doing this?

Michael Robinson
Michael Robinson
1 year ago
Reply to  CalLadyQED

I do think about that dynamic! And I’m glad you brought it up. When we’re slow traveling, we generally rely on Airbnb only to secure a short-term place to stay. We’re in a small town in Costa Rica now that’s not really much of an expat destination. While we found and booked an Airbnb for our short-term needs here to ensure we’d have someplace to sleep when we arrived, we spent our limited time in the Airbnb scouring the local market for housing at local market rates. We both speak Spanish which helps a lot! We can communicate with people… Read more »

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