Guest Post: Why geographic arbitrage is so important to retire early and what you can do to about it

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 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.Read More »

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Housing Choices in Early Retirement: Rent vs. Own 

One of the idiosyncrasies of the ERN family early retirement plan is that it involves a relocation. It’s not that we don’t like our current location. But even with our nest egg solidly in the seven figures we likely couldn’t afford to retire here comfortably because of the insanely high housing costs. The state income tax rates are also unpleasantly high. So, if everything goes well we will relocate to another state with low or no income tax and lower housing costs.

The options we consider:

  1. Own a house, mortgage-free
  2. Own a house, plus mortgage. But what term: 30-years or 15-years?
  3. Rent a house or apartment, long-term
  4. Nomadic lifestyle: have no fixed residence, move from place to place with light luggage

Ok, I have to admit, I threw in that last option just for fun. Some people can pull it off (GoCurryCracker), but I doubt that the nomadic lifestyle is for us. I like to have a home base! The way I can tell is that as much as we love to travel, it’s always nice to come back home to sleep in our own bed. Even if I know I have to head back to the office the next day. Seriously!

Quantifying the tradeoffs

We can write as much as we want about the pros and cons of renting vs. owning, but in the end, it all boils down to the numerical assumptions, especially the rental yield (annual rent divided by purchase price):

  • If we can rent a house for only 5% p.a. of the purchase price or less it’s likely a no-brainer to rent. The opportunity cost of our money tied up in a house plus the depreciation and taxes would be too large. Unless, of course, we factor in huge property appreciation. But our baseline assumption is that property values appreciate with the rate of inflation. The last time folks were budgeting outsized returns in housing it didn’t end so well, remember 2008/9? So, renting can be much smarter than owning, see some examples at 10!Rocks and Millenial Revolution.
  • If the annual rent is 10% or more of the purchase price, it’s almost a slam dunk to buy.

Somewhere in between has to be the sweet spot. Let’s check where’s that crossover point in the rental yield!Read More »

Why would anyone have a mortgage and a bond portfolio?

We are homeowners with a pretty sizeable mortgage but we also accumulated a nice retirement nest egg, which is actually many times larger than our mortgage. Even our taxable investments are several times larger than the mortgage. Still, we don’t pay off the mortgage because we like the benefit of leverage. We have a liability with a low-interest rate and assets with a much higher expected rate of return, so our overall expected rate of return is higher than without a mortgage. Our friend FinanciaLibre (now a defunct site) did some nice number crunching on this topic recently and we agree wholeheartedly.

Moreover, if you follow our blog you’ll also remember that we take a pretty dim view on bonds:

So, personally, we skip the bond allocation altogether. Others have written about this, too, check Physician on Fire’s 2-part guest post here and here. In light of all of this, here’s one question that occurred to us:

Why would anybody have a 30-year mortgage at about 3.50% and a bond portfolio currently paying around 1.8 to maybe 2.5% interest for safe government bonds?

Leverage works only when the asset has a higher expected return than the liability!
Read More »

How to invest a house downpayment fund

Our previous post on emergency funds got a lot of traffic and we received mostly praise for the post (see here and here). One issue mentioned by some that got us thinking is how to save for a house down payment or some other large expense in the future. Should we apply our same rule as for the emergency fund, i.e., invest it all in risky assets to get greater expected returns and avoid opportunity cost? Or is this a different animal from an emergency fund?

Since we still can’t time the stock market we would lean towards keeping money in stocks until it’s time to withdraw. So we first make a case in favor of equities. But we concede that there can be situations where you want to take less risk, say, where you could lose your dream house if you are short even a single dollar in your down payment fund, so we present some options for that scenario as well.Read More »

REITs pros and cons

We live in a low-yield world. Interest rates are much lower than in recent history and this has spurred a mad “search for yield” whereby investors look for anything, really anything, that offers yield above the measly low interest rates currently prevailing in this country. REITs have greatly benefited from this trend and when my hairstylist starts telling me that he invests in REITs it makes me wonder if that sector might be a little bit overheated (brings back memories of the late 1990s when a different hairdresser in a different city gave out Tech company recommendations). Here are some pros and cons of REITs.
Read More »

Real Estate: Buy or Rent?

If there’s one major disagreement in the Early Retirement community it’s on buying vs. renting your home:

  • Mr. Money Mustache apparently owned two homes at some point, lived in one and rented out the other. Both properties were paid off. He might have sold the rental property recently if I remember correctly, but still owns his primary residence. Owning real estate seems to have worked out all right for him. But he also points out that if you have to live in a large metro area, renting an apartment in town is probably better than owning a McMansion in the suburbs, with all the additional costs attached to it, see here.
  • Go Curry Cracker are renters. Mr. GCC had a bit of a traumatic experience as both a homeowner and an involuntary landlord. Besides, with their busy travel schedule they seem better served renting.
  • Jlcollinsnh thinks owning a house is a terrible investment.
  • Yours truly, Mr. and Mrs. ERN, live in a condo. The property has appreciated quite a bit since the purchase. But had we invested the down payment in an equity index fund, we would have gained as well. I once did a careful exercise to calculate our current gain net of the equity index opportunity cost, and we did come out ahead quite a bit owning our place. But this experience may not be typical. It may certainly not be replicable going forward.

We personally believe that the pros and cons of homeownership are about balanced. The median household with the median income and wealth living in the median U.S. city should be about indifferent between renting and owning. The personal idiosyncratic factors would tip the scale in one direction or the other:Read More »