When the term geo arbitrage is brought up, it is usually within the context of moving to some exotic country overseas and setting up a digital nomad-type business or possibly retiring there with a modest pension. Nobody thinks of geo arbitrage to move from California to Wisconsin.

The problem is moving across the globe to a foreign country is impractical for most people. Don’t get me wrong; I have considered the entire concept of moving overseas. A cottage industry is designed around second citizenship, investing, banking, and working overseas. Plus, who doesn’t want to experience the world’s cultural wonders? However, people need to consider how much better your life can be by simply changing your geographical location inside the U.S. or whatever country you live in. There are states and areas within states that are vastly more expensive than other areas. The high cost of housing, taxes, and the overall cost of living can be downright crippling to a lot of people.

I recently came across this quote from Entrepreneur.com…

“The city topping the list is Arlington, Virginia, where residents making between $91,000 and $152,000 are considered lower middle class due to the area’s high cost of living (41% higher than the U.S. national average.”

If you already live in Arlington, VA, I either feel sorry for you or perhaps you made $300K and have finally moved into the middle class! What is so absurd about this scenario is that $152K could easily be a nice, comfortable upper-middle-class income or higher in many places in the U.S. What is worse is that the average salary isn’t $152K, so I wonder how many people in places like Arlington are living below the lower middle class due to their monthly expenses.

When I suggest this to people who live in places like New York City, Seattle, Portland, Chicago, or coastal areas like Miami, L.A., etc., I get immediate pushback that the lack of economic options and amenities they enjoy in their very expensive current location doesn’t exist in places like Wisconsin, Indiana, or Michigan. Let’s discuss that.

Lack of Job Opportunities

This is generally the first objection tossed out. People will point out that you can’t do that in Indiana if you want to work in the tech industry, for example, making $400K per year as a software engineer. You will indeed be unlikely to make $400K in software in Indiana. It is not impossible, but I concede that it is unlikely. However, you can still work in technology and earn a great income. In our connected world it is getting easier and easier to work remotely for people anywhere in the world via a laptop and Internet connection. Further, if you follow one of my core principles and start a freelance business you can easily work in tech as I have been for the past 20 years.

However, here is the key: when people say they can’t earn the staggering amounts of money paid if they don’t work in Silicon Valley or Seattle, again using my tech example from above, you also don’t have the corresponding expense side of the ledger, especially for housing costs. When your average 3-bedroom 2, 2-bath home in Seattle or San Francisco costs $1 million or more, you need to make $400K to afford it.

When you combine that expense with taxes and the cost of everything else, you can see why you need to make $400K to “make ends meet.” If you doubt what I am saying, look at the stories that started popping up during COVID-19 when tech companies began allowing employees to live elsewhere and work remotely. There were immediate discussions about lowering their salary because, wait for it, their expenses weren’t as high now! So, from the tech company’s point of view, there was no reason to pay someone the wages of a Silicon Valley resident if they lived in another part of the country.

A $150K per year income in Wisconsin, Indiana, or anywhere in the middle of the U.S. will allow you to buy a 4-bedroom, 3-bath home with a nice yard and good schools in a great neighborhood and still have money left over to live a decent life. You don’t need as much money to buy better housing, entertainment, etc., as you need to buy anywhere near the same thing in a more expensive location.

Create Your Own Economic Opportunities

While my example above was based on being an employee making a pile of cash working for some company, you should make your own economic opportunity and ditch the employer. If you build your own freelance business, you can design it any way you want. If you’re going to work in tech, become a freelance software developer or I.T. consultant. If you’re going to work in marketing, build your business around consulting, copywriting, and marketing. You can design your business to be portable so you can move around.

The benefit of being a freelancer is you can build your business around your lifestyle instead of building your lifestyle around a rigid 9-5 employer. You can quickly create a company with multiple streams of income to add extra security to your income. Further, when you have a business, your income isn’t capped by what an employer can afford to pay you. You make whatever income you want.

I know several fellow freelancers who have set up an online business and run them from all over the world, quintessential digital nomads. Making money online has removed the shackles of living in one fixed location, especially in a high-cost-of-living location if you don’t want to. I know one guy who lives in a small town in the South of Spain who sells digital products. His cost of living is practically nothing and he can run his business from anywhere if he has a laptop and Internet connection. While I started this article by saying geo arbitrage should be within the U.S., I hope you can see his business could just as easily be in Michigan as it is in Spain.

Years ago, I took my family to Yellowstone in Wyoming. Each morning, I sat under some trees while my kids were getting ready and answered emails and phone calls with my cell phone. None of the people I was talking with had any idea where I was at, my physical location was not an issue.

Lack of Culture

Right behind the lack of job opportunities is the argument that the culture doesn’t exist in the Midwest like it does in New York City or Boston, for example. Both cities have incredible theatre, art museums, sports, dining, and other great cultural opportunities. It is also true that the cultural opportunities in the Midwest don’t rival the quality of the same opportunities in those cities.

However, all that culture comes with a hefty price tag. When your average Broadway theatre ticket can easily cost hundreds of dollars or more and a nice dining experience can run as much, you soon discover that you need to make a lot of money to participate in those opportunities. Otherwise, housing, groceries, and other day-to-day living expenses will consume your entire budget, leaving you very little extra for all those fantastic cultural opportunities.

In the Midwest, we do have culture. The city I live in has an art museum still rated in the top 10 in the country. I also have a fabulous zoo, park system, orchestra, and an excellent local art scene. We only have a few sports, minor league baseball and hockey teams, but no football or basketball. So, clearly, I do give something up on the cultural side, but I can easily afford all the culture my city offers AND have a nice home with a yard and still have plenty of money left over for investing and building wealth. I could not buy the same corresponding lifestyle for the same income if I lived in New York City.

Not every city in the Midwest will have what my city has, but most still have good options. Plus, because people who live in a lower-cost-of-living area have more disposable income, they can take a trip to New York City to absorb some of the great culture there and still benefit from an overall lower cost of living.

There’s no way around it. If you want to be a capitalist, you have to build capital. You do that by producing more effectively and consuming less.

- Doug Casey

Investment Opportunities

To build wealth, you need to first start with building capital, which is used for investments. Without capital, you can’t invest. Creating that wealth gap is much easier when your living expenses are lower. Plus, you can still have a decent lifestyle for the money you spend to cover living expenses. Instead of living in a 400-square-foot apartment in New York City, you can buy a 3,500-square-foot home with a yard, a great neighborhood, and good schools. So, building a wealth gap doesn’t have to come at the expense of quality of life.

Once you start building up your capital, you can find some good alternative investments in the Midwest, particularly in real estate-related assets. In my area, investment real estate generally meets the 1% rule, meaning that one month of rent equals 1% of the purchase price. This is a rule of thumb, and other factors must be considered before deciding if an investment is a good opportunity. Still, the point is that finding 1% properties in the Midwest is relatively easy. It also means it is much easier to purchase cash-flowing passive income properties.

If you like notes backed by real estate, you will find more affordable notes on properties in the Midwest than you won’t find anywhere else. You can purchase a mortgage note for $80-150K without many problems, and that would be on a decent house in a reasonable area that people can afford to pay off.

If you want to do private lending on real estate investment projects, you will also find plenty of opportunities in the Midwest. Without leaving my town, I can find multiple lending opportunities to execute out of a tax-advantaged retirement plan. This allows me to make 15% on my money AND be near my investments to keep an eye on them. A loan for me might be around $100-150K, which, if I were in L.A., would easily be six times that amount for a loan! It is much easier for me to put $150K of capital together than it is for $650K, plus it is considerably less risky.

Let’s say you had $500K in your retirement plan to lend out. Would you rather have five loans at $100K each or one loan on one property for $500K? If you answered five, you might be a pretty good private lender. If you choose the $500K loan, I suggest you find another line of work. Your risk would be sky-high. Plus, I can turn five loans over faster than one loan for a larger project—velocity of money.

Not only is it easier to build capital by having an overall lower cost of living, but purchasing alternative assets requires less capital, which allows you to grow your portfolio much faster. Plus, the assets will perform better because rents and/or mortgages are affordable for most people and don’t require as much capital to purchase.

The advantage of geographic arbitrage is the ability to make less money and achieve financial freedom even faster. It is remarkable that simply crossing state lines can produce such dramatic shifts in the ability to achieve financial independence.

government stealing taxes from citizens

Better Legal & Tax Environment

Follow my other core tenant of investing in alternative assets, and those assets include owning physical real estate. You will *generally* find a better legal environment for managing those properties in the Midwest. Not always, short-sighted, stupid politicians exist everywhere, but we have fewer of them here than in places like Seattle, San Fransico, or New York City, for example, with their higher taxes. I have a friend who owns investment real estate in California, and I often shake my head when she tells me about the absurd laws for rental property owners.

In the same vein, taxes are *generally* lower in the Midwest on real estate and even for income. A lower tax basis will translate into more cash flow. In my state I still have higher than I would like property taxes, but still much lower than I would have in a more expensive area. Places like New York and California are legendary for their state income tax. The people who can afford to leave those states either permanently or at least six months of the year to escape them usually do. 

I also find it easier to move around to optimize my tax scenario in the Midwest. For example, I chose to move to a township about eight years ago. In my state, in a township, you don’t have a governmental entity collecting income taxes, so my freelance home-based business has no local income taxes to pay. While I am sure townships exist in other parts of the country, if you choose to live in a place like L.A., you will likely have to travel far from the city to live in a township. For me, I am still 20 minutes from anywhere in my city. I get a favorable tax scenario and don’t have to live 60 miles away. 

Travel & Location

One overlooked benefit of living in a lower-cost-of-living area is that you generally have a lower population. That lower population translates into less traffic when traveling places. The traffic issues in and around L.A. or New York City are legendary. In the Midwest, we generally don’t have those issues. That means the cost of gas, insurance, and vehicle ownership are usually lower. Plus, I have the added benefit of getting just about anywhere I need to go in 20 minutes or less, even to my downtown. In New York City, a lot of people choose not even to own a vehicle and use public transportation, which, if you don’t mind doing that, great, but I like the freedom of going where I want whenever I want and being able to do so with a lower cost and time investment.

In the Midwest, other assets like parks, farmer’s markets, and dining options are close and relatively easy to get to. For example, I have a large park with many fantastic hiking trails about 8 minutes from my house. If I lived in New York City, for example, living that close to Central Park would cost millions of dollars.

Most Midwest cities are also near farming areas, which means access to fresh produce and farmer’s markets, again very close and affordable. Some years ago, I was traveling in New York City and was in Manhattan on a day there was a farmer’s market. I wandered through, and while the selection wasn’t terrible, the crowd was intolerable, and prices were even worse. I found one vendor selling what back home we classified as a common weed, selling it for $5 per pound! When I asked him about it, he said people liked purchasing it for their salad. I explained that my mom had a garden back home, and we threw pounds of that stuff away every week to get rid of it. We were both equally stunned by each other’s situation.

I know everyone has opinions about this stuff, but I have a better quality of life that is closer to me, easier to travel to, and more affordable to access. These traits help me lower my cost of living even more while raising my overall health and quality of life.

What each of us calls our “necessary expenses” will always grow to equal our incomes unless we protest to the contrary

- The Richest Man in Babylon

Midwest Weather

No article on geo arbitrage would be complete without talking about the weather. Most areas in the Midwest have four distinct seasons each year. If you like winter sports, you will find plenty of opportunities to do them and plenty of snow during the winter months. Our summers can have some hot and humid days, unlike what Florida experiences from June to August.

Several Midwest states border or near The Great Lakes, which should be called inland seas for many lakes. Lake Michigan, Superior, and Huron are enormous, with incredible beaches and fabulous beach towns that rival any beach town in the coastal states of the U.S. The summers are amazing there. We have lovely spring and fall seasons as well. Many people tell me that fall is one of their favorite seasons in the Midwest where you get cool days and crisp nights perfect for hiking and other outdoor activities.

Suppose you despise winter (like me) and explain that if you live in California, you don’t have to deal with winter. With our lower cost of living, you can become a snowbird and spend the summers in the Midwest and the winters in the South, like Florida, Arizona, or any number of southeastern states with mild winters. This becomes even easier if you have a portable freelance business that allows you to earn an income from anywhere. My freelance business provides marketing, copywriting, and media production services. All I need to work is a laptop, cell phone, and Internet connection. I can do it from anywhere. My clients rarely know where my current geographical position is when they call to discuss something or start a new project.

For those of you in expensive areas like Portland, Seattle, and New York City, winter still comes, but you can’t say you have great weather year-round because you don’t. However, your expenses are year-round.

Conclusion

The concept of geo arbitrage is much sexier when you talk about living in Costa Rica or the South of France, but there are plenty of reasons to locate within the U.S. to a lower cost of living area. A lower cost of living will allow you to build capital faster because your cost of living is so much lower. You don’t need the same level of income to live a great lifestyle and build capital. It is easier to meet your financial goals with a low cost of living. Plus, you don’t give up nearly as many amenities as you think you do.

Your lifestyle can be much nicer at a lower price tag, what is there to not like about that? The middle of the U.S. has many of the same features as the high-cost areas but at a much lower cost of living. If you can’t give up your costly current location, no problem; just boost your income to $150K and live in the lower middle class like the people in Arlington, Virginia.

Disclaimer

The information contained within this website is provided for informational and educational purposes only and is not intended to substitute for obtaining legal, accounting, tax, or financial advice from a professional tax planner or financial planner. Full disclosure

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