"Arbitrage” is an investing term that means taking advantage of a difference in price for the same asset, in different markets.
So, buy something in China, then sell it in the U.S. for more money. All those buildings downtown that say “Import-Export”? That's what they do.
When I was 22 I learned the more-specific “geo-arbitrage” reading The 4-Hour Workweek, which describes a simple premise - the practice of moving somewhere cheaper to improve your life.
Example: your dad's social security check of $2200/mo doesn't go far in L.A. County, but he can sure live like royalty in Panama, among other places.
But there's no need to wait until you retire - the remote work trend has spurred many full-time Zoom employees to become “digital nomads”, working from $400/month 2-bedroom apartments in Oaxaca or Thailand.
These examples illustrate a broader point - if you're willing to move into certain areas, you can significantly increase your quality of life, with no increase in your expenses.
But you don't have to leave the country. Moving one zip code over can make a huge difference in your life.
Two weeks ago I talked about undervalued and overvalued areas, and the enormous equity available if you pick the right area, and get in early.
But there's an additional angle for existing homeowners. You can do well trading your overvalued home for a new house in an up-and-coming area.
Twice in the last few months we helped homeowners sell for top dollar in hot areas (Silver Lake and Atwater), and trade into huge Spanish homes in Glendale. In each case, they sold for $2.2mil, then bought for $2.2mil.
So a lateral move in price, if it's to a different area, can often mean a huge increase in size and quality. In both cases, the homes were twice the size, and far nicer, but the same price.
Remember that fashion is set first by innovators, then early adopters, then the majority, and then the laggards.
But unlike clothing, where value goes down (and I can buy your $400 Spring 2021 pants at Crossroads for $40), in real estate, the early adopters can sell to the laggards at great profit, then pay comparable prices in a nearby neighborhood that's earlier in the cycle.
The life-cycle of a neighborhood (I just made this up) could be broken into five stages: Early Buzz, Gentrifying, Red-Hot, Stabilized, then Fading Winner.
For neighborhood arbitrage, trade Red-Hot for Early Buzz, or Fading Winner. I like Fading Winners more than Early Buzz. You can't always pick the Early Buzz neighborhoods, but Fading Winners will always come back.
More on that next week.
