Geographic arbitrage is the practice of taking advantage of different prices in different markets. This could be applied to tax, dividend, rent, living costs, etc.
I am taking ￼geographic arbitrage to a whole new level in my journey to early retirement: I lived in Germany for the past 5 years, and I’ve been investing in Portugal, where Real Estate is way cheaper. But Real Estate isn’t the end of it. This is, in fact, another reason why I am moving to Portugal this year.
In the following, I address the differences between Germany and Portugal, and relate that to geographic arbitrage. I go over geographic arbitrage in great detail in my book, “My strategy to retire early“.
1) Salary – the killer of geographic arbitrage
I work in Germany as a consultant. My salary in 2015 was 52k/yr. This translates into a €2400 net monthly salary. As I have stated on the blog before, I live off of €800 so that I can invest €1600 every month. From October 2016, I stopped saving money as the €1600 monthly free cash has been invested into renovating Rental Property #3 (RP#3).
If I stayed in Germany, my salary would rise to €2800 net a month in a few months. This means that, with the same living standards, I would be saving about €2000 every single month. I am currently looking for a job in Portugal, but I think that I will only earn €18.000/yr, at most. Note that we’re talking about countries on both ends of the European scale, when it comes to salaries.
Now, although salaries are way higher in Germany, life isn’t that great there. Continue to read to find out why.
First red flag of living in Germany: rent is super high and you need to share a flat in order to find affordable rent. My flat rents for €800 month (including utilities – with adjustments at the end of the year). I share it with a flatmate, which brings my cost down to about €400. In Portugal, I can get an entire flat for €250/mo. In fact, my RP#1 rents for €275/mo. If I share a flat, I could bring this down to €140/mo.
Food is generally cheaper in Portugal. At supermarkets, prices don’t vary that much. Now, going out for lunch or dinner is incredibly cheaper in Portugal. You can eat out for as low as €2.5 per meal (+ drinks). What you typically do is to buy an entire portion and that is usually enough food for 2 times. Another option is to go to a restaurant. For a meal like this:
for €3.5 (including a drink and an espresso).
In Germany, this meal would never cost less than €10. An espresso alone costs 60 cents in Portugal, but at least 2 euros in Germany.
4) Maintaining a car
A car is really the killer in this context. In Germany, the minimum insurance for a car runs for about €800-€1000/yr. In Portugal, such insurance costs considerably less. Minimum coverage goes for €150/yr.
5) Taxes – the main killer of geographic arbitrage
The greatest advantage of Germany is the tax code. I can write off a lot of expenses, being an expat here. In particular, I can declare my household in Portugal, which entitles me to write off flights to Portugal (and rent in Germany).
Now, next year I hope to get a freelancing tax free job or a post-doc grant (which only pays about €18k tax-free). If I get a grant, because it’s tax-free, I can sum up my entire income and pay only about 14.5% of all my income (after writing off my expenses, including expenses with my rental units). I estimate this will result in about 10k of income which is really taxed at most at 14.5%. Getting a post-doc grant in Portugal sounds like a great thing right now, because of taxes. This is only possible if I move to Portugal, though.
Later on, my income will grow and I will start to be taxed at 30%+. At that point, I plan to open a company to declare my rental income and start extracting cash out of the business, writing a lot of expenses off.
6) Real Estate Investing (REI)
Undeniably, the best part of geographic arbitrage in my own situation is cash ready to be invested in low-priced Portuguese real estate. In Portugal, Real Estate in many markets is currently trading way below construction cost. This is the reason why I can get deep-value deals yielding 20% net.
I can only save €1600 per month, living in Germany, because I aggressively cut on basic pleasures, avoid having a car, and so on. With the same living standards, I could probably save the same amount living in Portugal, where the quality of life is considerably higher (not even comparable, in my opinion).
So far, I’ve been taking advantage of geographic arbitrage because by saving aggressively I could buy Rental properties. There was no chance I could save equally aggressively in Portugal and save enough capital to buy 10 units, as I’ve done so far. I definitely recommend you go to a different country or state, where you can make more money, save aggressively and invest in a place where you want to retire.
Your biggest fan,