Today we feature a Guest Post from my blogging buddy Benjamin Davis. A very exciting and important topic: Geographic arbitrage! Benjamin holds a Ph.D. and decided to become a landlord to retire early. He writes on From cents to Retirement, a blog about early retirement and real estate investing. He also wrote the book My strategy to retire early (paid link) and runs a real estate and investment consulting business in Portugal. His goal is to build a real estate portfolio with 100 units before he turns 35 and turn From Cents To Retirement into a reference blog for early retirement through Real Estate investments, while he inspires others with his own story. Take it away, Ben!
I was born in Portugal and divided my childhood between Portugal and Italy. I lived in Canada and Germany after that. My family is Canadian and Italian so you can imagine how much I have been exposed to different cultures.
When I decided I was going to retire early, I needed to select the country I was going to live in. I decided to move to a country that would allow me to take advantage of geographic arbitrage, which is defined as the practice of taking advantage of different prices and tax rates in different markets.
There are multiple reasons why I selected Portugal. It would be very easy to talk about the food, the weather, the overall quality of life, etc. But this post is to talk about the financial aspects of this decision.
First, keep in mind that the annual average salary in Portugal is below $25,000or a little more than $2,000 a month. That is the official number, but I know very few people earning this much. In fact, I think that the most common salary per person is somewhere between $750 and $1,400 a month. And that is way more than necessary to live.
After living in Germany for 5 years, I know I wanted to live in Portugal. I currently earn about $1,700 per month, and I live off of $600. That is enough for me to have a reasonably good life, as I do not refrain myself from anything. To generate $1,700 with a 4% annual withdrawal rate, you need just a little bit over $500,000. Mind blowing, right?
That means that you “only” need half a million bucks to retire if you are willing to cross the ocean and get to live in the sunniest country in Europe. It seems like a tough decision, right? That was the decision I had to take a few years ago when I decided to retire early. Today, I can see a number of advantages of having chosen Portugal:
1: Great quality of life
Great weather, great food, cheap services and very low crime rate. Plus, for US residents, this is a plus: Portugal usually ranks top in Europe as far as English proficiency is concerned.
2: A great real estate market:
First, properties are way cheaper than in most countries in eastern Europe and the US. You can pretty much start investing in real estate, in Portugal, for as little as $50,000. At the same time, I personally believe that Real Estate in Portugal will appreciate way more than in most other countries in the next years. There could be a correction at the European level, which should normalize the markets, given that more and more people move within Europe.
Second, yields are pretty juicy. Not only the acquisition costs are low, rents are pretty decent. Of course that there are specific markets where rents are better, as in any country, but overall I’ve been able to make investments yielding almost 20% net per year.
Third, there is a variety of mortgage types you can get, and as there are many banks in the country, the conditions are pretty competitive. I personally use a mix of properties paid in cash and leverage, by getting 30-year fixed mortgages. Currently, I own 14 units and I expect to grow my portfolio to 100 units before I turn 40.
3: Wonderful tax advantages for expats/retirees
For instance, if you are retired and you get a pension from your home country (or any other country, for that matter), your pension will not be taxed in Portugal. Plus, as a resident, you get full access to the public healthcare system (just like natives do). As of today, if you want to retire in Portugal and want to commit yourself to live there for a few years, you can get legal residence status in no time.
4: Cheap to travel within Europe, from Lisbon or Porto.
[ERN: I noticed that too: TAP offers some really inexpensive airfares from their hub in Lisbon to a lot of European cities and also from North American airports. We will definitely come and visit once we’re retired!]
Today, I run a consulting business that helps investors from abroad investing in the Portuguese real estate market, in a totally passive way. If you want to educate yourself about the real estate market, you can check out my blog, where I post hundreds of resources, from free real estate books to “landlording” tips such as where you can dump a couch. One of my advisees has decided to come to Portugal to retire, and could not be happier about his decision.
The purpose of this post is to open your horizons when it comes to retiring early, and choosing the place to do so. You can retire much earlier if you decide to take advantage of geographic arbitrage. You don’t have to go to Portugal or any other country far from the US. You can perhaps look for a better place within the US. However, I see that many FI seekers do not consider this aspect and I know how much of a difference it can do in a plan like this.
Choose wisely. Retire earlier.
[ERN: awesome post! Thanks for sharing this! We will probably not yet pack our bags and move to Portugal permanently. But it’s nice to have that option in case we need to cut our expenses in retirement!]