Arbitrage is when you take advantage of price differences between two or more assets, and then profiting until the price difference disappears. Recognizing when and where to take advantage of these kinks will be one of the greatest catalysts towards financial freedom.
For example, I realized a few months ago that clothing is a lot cheaper in Mexico. Genuine leather jackets are only $200 USD. In the U.S., you’d be lucky to find faux leather for less than $400! Whenever I needed clothing, I would just hop on a plane to Guadalajara, Monterrey, or Mexico City. It’s a 4-hour flight and $200, but much less than my drive to Cleveland, Ohio!
Today, I’ll share with you a few of the most obvious arbitrage opportunities.
1. Full College Scholarship for $0/year in Tuition
I saw many of my peers attend more expensive universities. I chose a small liberal arts college in Connecticut that gave me a full scholarship. I could have attended an Ivy League university, but it would have been a detriment because my parents didn’t make much money.
The max arb opportunity would be going to one of the cheapest public universities, and then getting a job in one of the most lucrative industries. I’ve seen countless kids go from the University of Illinois paying $12,000 a year to working in investment banking 4-years later to net a total salary of $130,000. You could cover your tuition working the $9.25 minimum wage and still make it out debt-free.
5 years since graduating, people still believe that attending a much more expensive private college is better than a public university. Unless you are rich or receive a scholarship like me, save your money and go to the best public school available.
2. Buying Chicago Real Estate in 2016
After 2 years in New York, I moved back to Chicago in 2016 with an investment banking job opportunity. Chicago real estate was ~60% cheaper on average than New York’s.
The massive valuation discount was odd because I found the lifestyle in Chicago to be the same, if not better. They both get cold in the winter. However, Chicago was much cleaner, less stressful, and less crowded. The people were also nicer.
When I moved back, I bought a two-bedroom, two-bathroom 1,200 sq. ft. condo in River North for $400,000. It was a steal back then!
Three years later, the unit is now valued at close to $480,000. A 100% ROI on my equity in 4 years is not bad!
3. Starting My Own Business in 2017
After leaving investment banking in 2017, it became apparent that having an internet-based business with unlimited scale was the future. I decided it was finally time to put my mind to work.
I started with investment banking prep consulting. I charged students $49/hour to prep them for the upcoming investment banking interviews in September. It was something that I enjoyed doing, and ended up earning an extra $25,000 my first year. Not bad!
A year later, I transitioned over to finance consulting for start-ups and small companies. My hourly consulting rate went up to $79/hour to match my experience in private equity. Now with the Tax Cuts and Jobs Act of 2017 passed, I’m saving 20% more from taxes because I’m able to deduct 20% of my qualified business income!
If you have experience in a field, it behooves you to work as an independent contractor and fill that hole. You’d be saving 20% more because of the new tax cuts! Keep at it for a long enough period and you will enjoy incredible rewards.
4. Investing in Heartland Real Estate
Although there are micro-arbitrage opportunities to buy homes in NY and Chicago, there is a much bigger arbitrage opportunity to buy real estate in the heartland.
It takes at least $250,000 in household income to buy a median-priced $1 million home in New York. That doesn’t really leave much room for arbitrage.
In January 2019, Google announced it will spend $13 billion to expand in Nevada, Ohio, Texas, and Nebraska. Uber, in late 2019, announced it leased an office building in Dallas for 3,000 employees. Companies based in expensive coastal cities nowadays are expanding inward to lower-cost areas of the country. Employees will follow suit thereafter.
I recently bought a duplex in Nashville for $280,000. It was an excellent investment because the cap rate is about 6% after all expenses. On an IRR basis, I’m projecting 15% or more. My bet is commercial and multi-family properties in the heartland will provide healthy returns in the future.
The key is to find the next San Francisco and NYC. I think Austin, Omaha, and Raleigh are those cities.
If you are an accredited investor, use CrowdStreet. CrowdStreet focuses on 18-hour cities, where there is emerging growth at lower prices. My favorite platform for non-accredited investors is Fundrise because of their diversified eREITs that invest in specific regions.
5. Credit Card Churning
If there is anything to know about me, it’s that I like free stuff. I earn about $4,000 to $6,000 a year in free flights and hotels through credit card churning. Many credit card issuers offer great welcome bonuses. New applicants earn a big bonus for spending a specific dollar amount within a time frame.
In 2019, I signed up for 4 airline and 3 hotel credit cards. I earned 70,000 American Airline, 70,000 Delta, 120,000 United Miles, and another 320,000 in various hotel points. That’s free travel for two years!
