The Easiest Way To Make Money: Recognize Arbitrage Opportunities

The Easiest Way To Make Money: Recognize Arbitrage Opportunities

Arbitrage is the practice of taking advantage of a price difference between two or more assets or markets, and profiting until the price difference disappears. Recognizing arbitrage opportunities is one of the easiest ways to make money.

Being able to recognize and then take advantage of kinks in the system will be one of your greatest catalysts towards financial freedom. Investing in long-term trends is another great way to make money.

For example, as a elementary-schooler in Taipei, Taiwan, I would buy Nerds candy at the U.S. commissary for 25 cents and sell them to my classmates for 50 cents.

Only foreign service families had access to the commissary. But eventually, other candy stores opened and my profits were competed away.

Today, I'll share with you one of the most obvious arbitrage opportunities. It is an arb that my wife and I are wholeheartedly engaging in because we love free money.

The Easiest Way To Make Free Money

The 10-year bond yield has fallen from a high of 3.21% in October 2018 to ~1.56% in September 2019. A 1.65% decline is huge because, on a percentage change basis, we're talking about a 51% decline.

Back when the 10-year bond yield was at 3.21%, one of the best online savings rates I could find was CIT Bank at 2.45%. I track CIT Bank closely because they not only offer one of the best rates, but they are also an affiliate partner and I get all their updates via e-mail.

A 2.45% online savings rate back then was competitive because the yield curve was upward sloping. Getting a higher risk-free rate would require owning a longer-term Treasury bond until maturity. The reward for locking up your money for 10 years in a Treasury bond was therefore 3.21% – 2.45% = 0.76% a year.

Given the 10-year bond yield is down 1.65% since its 2018 peak, you would think that CIT Bank's savings rate would be down a similar amount. In fact, that's not the case at all.

The latest savings rate for CIT Bank is 2.2%, a decline of only 0.25% since its 2018 peak. In other words, U.S. buyers of 10-year Treasury bonds today are being NEGATIVELY rewarded by 0.76% (1.56% – 2.2% = -0.64%).

Not only is the online savings depositor now earning 0.64% more than the 10-year Treasury bondholder, but there is also no lockup period and no risk up to the FDIC-insured $250,000 per individual and $500,000 per couple.

Take advantage of the risk-free arb

We are now talking about one of the greatest risk-free arbitrage trades in modern financial history. As a result, everybody should be taking advantage until this arbitrage disappears by opening up a high-interest savings account.

Because eventually, after CIT Bank and other banks providing a similar online interest rate have received enough inflow of deposits, they will lower their interest rates and this opportunity will disappear. This rates are subject to change.

If you want to take on risk to potentially make more money, you can open up a high-interest savings account and short long-term Treasury bonds through an ETF like IEF.

There is certainly a chance that after such a huge move up in Treasury bonds, they could come off. But I'd rather keep things simple, and partake in the risk-free side of the trade, especially if you don't have experience shorting securities.

A History Of Money-Making Arbitrage Opportunities

Here are some other arbitrage examples that have helped me boost wealth. The goal is for everyone to review their previous trades and find new ones.

1) Went to a public university for $2,800/year in tuition.

I saw my older sister attend a private university for $22K/year and saw no noticeable benefit. In fact, attending a private university was probably a detriment because my parents didn't make that much as government employees.

The max arb was going to one of the cheapest public universities and then getting a job in one of the most lucrative industries. Even back in 1995, $2,800/year sounded like a bargain because I could cover the tuition working at my $4/hour minimum wage job.

More than 20 years later, it's funny to see that people still believe there's a positive spread in attending a much more expensive private university than a public university. Unless you are already rich or have huge scholarships, please save your money and go to the best public school available.

2) Buying San Francisco real estate in 2003.

I came to San Francisco with a raise and a promotion after two years in NYC. The finance industry was thriving in SF and I realized plenty of people were making just as much money as people in NYC. Yet, San Francisco real estate was ~30% cheaper on average than New York real estate.

The massive valuation discount was odd because I found the lifestyle in San Francisco to be better. The weather was pleasant year-round. The city was more beautiful and less stressful. After going snowboarding in two feet of powder on a Saturday in Lake Tahoe and then playing tennis in 70 degree weather on a Sunday, I was sold.

When I walked into the open house for a two-bedroom, two-bathroom, 1,000 sqft apartment with a view of a park in Pacific Heights for $580,500, I clearly remember thinking it was a steal. Before walking up, for that price, I thought there'd be no view!

This condo would have sold for at least $750,000 back in Manhattan. Although NYC real estate has also done very well since 2003, it is not uncommon to hear reports that SF real estate is now equal to or more expensive than NYC real estate.

Related: Liquid Courage Is Why Cash Is Great

3) Starting Financial Samurai in 2009.

After finishing up business school in 2006, it became apparent that having an internet-based business with unlimited scale was the future. Our commencement speaker was Reed Hastings of Netflix who helped inspire us to think bigger. Once the financial crisis hit, I decided it was finally time to put my mind to work.

Although there were plenty of personal finance sites in 2009, I didn't recognize any personal finance sites written by someone who actually had a finance background. As someone who had 10 years of finance industry experience at the time, starting my own site seemed like an opportunity.

10 years later, there are still very few personal finance sites that are written by people with financial backgrounds for some reason. Therefore, there are still opportunities for finance industry folks to engineer their layoffs and start a finance website.

If you have experience in a field that is dominated by people without relevant experience, it behooves you to fill that hole. If you keep at it for a long enough period of time, I'm positive you will enjoy incredible rewards.

4) Buying panoramic ocean view property in SF.

Believe it or not, I did not realize there were panoramic ocean view properties in San Francisco until 13 years after arrival. Neither did most of my peers.

But after I found panoramic ocean view homes in 2014 priced at a ~30% discount to the median-priced SF home, I decided to rent out my old home that was trading at a 20% premium to median and buy a fixer in Golden Gate Heights.

In no other major city in the world do panoramic ocean view homes trade at a discount, and I've been everywhere. They all trade at hefty 30% – 100% premiums. The discount has since narrowed from around 30% to 15% in 2019, but I still see plenty of opportunity to buy property with views on the western side of the city.

Panoramic Ocean View single family homes In Golden Gate Heights, San Francisco are one of the best buying opportunities ever
Buying ocean view properties in SF is one of the biggest opportunities today

It is my belief that by 2025, the discount will narrow to 0%. We're talking about a $240,000 arbitrage benefit based on the median-priced home. By 2030, ocean view homes in San Francisco should start trading at a premium.

I encourage you to drive all around your city one weekend and see if you can find some neighborhood gems. I'm sure there will be places you have never seen or heard of that will blow your mind.

5) Investing in heartland real estate.

Although there is a micro-arbitrage opportunity to buy homes in SF with ocean views, there is a macro-arbitrage opportunity to buy real estate in the heartland, mainly due to cost and technology.

If it really now takes at least ~$343,400 in household income to buy a median-priced $1.6 million home in San Francisco, then SF-based companies are getting squeezed.

Google announced in early 2019 it will spend $13 billion to expand in Nevada, Ohio, Texas, and Nebraska. Meanwhile, Uber in late 2019, announced it has leased an office building in Dallas for 3,000 employees.

It's obvious that companies based in expensive coastal cities will continue to expand inward to lower-cost areas of the country. And it is logical to conclude that employees will follow suit. Technology allows us to easily connect with each other around the world.

My bet is that a portfolio of commercial and multi-family properties in the heartland through real estate crowdfunding will provide me a healthy return. After three years, the portfolio has done well overall: 14 investments have been very positive, three investments have been positive but ho-hum, and one investment has been a turd.

The key is to find the next San Francisco, Seattle, NYC, and D.C.

My favorite platform is CrowdStreet for accredited investors, given CrowdStreet specifically focuses on 18-hour cities, cities where there is emerging growth at lower prices.

My favorite platform for non-accredited investors is Fundrise because they have created diversified eREITs that allow to invest in specific regions to also take advantage of arbitrage opportunities.

Fundrise Real Estate Crowdfunding Properties

Keep A Look Out For Arbitrage Opportunities

There are money-making arbitrage opportunities, large and small, every single day. Take some time out of your week and dedicate at least one hour to figure one out.

My immediate focus now is paying attention to the San Francisco real estate market post-pandemic. The return to big city living is picking up steam, and I want to buy San Francisco rental properties to take advantage of rising values and rising rents.

I've spoken to dozens of employees from from tech companies who recently IPOed. A majority of them will be selling some stock to diversify their wealth.

It is my belief there is a window of opportunity to buy property right now when rates are down, fears of a recession are high, and a flood of money will be looking for a more stable asset. Recognize arbitrage opportunities every day!

For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. I help people get rich and live the lifestyles they want. 

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38 thoughts on “The Easiest Way To Make Money: Recognize Arbitrage Opportunities”

  1. From Ghana?how can some of us in Ghana can benefit from arbitrage betting. Since we do not have any bookmakers who have exchanged market to lay bet .Do you have any other means to help us.

  2. Lance Liberstein

    This goes without saying, but I am always looking for extra ways to make money, in E-Commerce, bank bonus opportunities, cash back on credit cards, etc.

    Coming from a Entrepreneurial/ Finance background and having owned many small businesses over the years, when Im not spending time looking for those money making opportunities mentioned above-

    I am looking for ways to save money on my monthly fixed expenses and better allocate my income. For example, I think there is a lot of value in taking one hour to price comparison your cable or internet bill- or any fixed monthly recurring charge. It saves maybe only $20-$30 per month, but X 12 months in the year- thats $240-$360 money saved for an hours time of research and action.

    I notice a lot of my family members and friends, do not think along these lines, and Always try to educate them on it.

    1. ****Added note: Funny story about the candy selling, I did that as well in grade school.

      I would buy a bucket of the cry baby candies in the bodega in the Bronx in my fathers neighborhood (where I went on the weekends) as it was slightly cheaper then my school where I attended in my mothers neighborhood where I lived , and sold them, at a 300% mark up. I would sell lollipops, lemon heads, as well.

  3. I feel like arbitrage is actually how the entire society works lol. I mean you look at the whole ecommerce boom with Shopify and Amazon FBA, these young cats all drop ship from China where the goods cost so little then they sell them online whether thru their own websites or Amazon store places. On a bigger scale, world economies work in this sense just that we’re so busy with our own lives we fail to see it. It’s actually quite simple and does not require much “genius” so to speak to figure out arbitrage opportunities… my mom yesterday bought a $50 voucher at an event and won a 65″ Samsung curved TV which retails for $1400, I posted it this morning and going to be selling it for $1200, there you go simple as that. Of course, my mom had to use her good luck for this haha but we don’t need the TV then might as well profit off of it.

      1. That’s a good article. We started on the coast. Bought a condo at the beach 20 years ago. Thing tripled in value in 4 years. We sold at the pinnacle and moved to Boise. Bought our home outright and eventually a few rentals. We owe nothing on them. Between that, my pension once I retire and my wife’s home business, we have more than replaced my income. Housing is rising at an astronomical rate here so it would be dumb to sell at this point. Huge demand. A dwelling unit shortage to the tune of 20,000. People pouring in nonstop.

        Here’s where my mind is going. This will end. I feel like I got very lucky twice. I can’t help but think that eventually I’ll have to have my eye out for the next place. I have a few uncles in the LA area who own big mobile home parks. The cap rate is not what it used to be for new buyers but still better than SFH’s. But on the bright side I can sell houses a lot quicker than a trailer park.

  4. If you short treasuries won’t most brokers hold that against your buying power i.e. not allow you to transfer the funds from the short into an online savings account?

  5. Getting a good paying career out of college and keeping at it – I wish I’d done that. I started in a modest paying job, went back to school to change careers (albeit an expensive program even with a good scholarship!) and I’m now just beginning to make good progress at increasing my wealth. You never know you did a poor arbitrage until after the fact.

  6. compoundsnowly83

    My wife loves to find various “arbitrage opportunities” and have saved us a lot of money over the years but I constantly remind her that the biggest arbitrage is maxing out her earning potential and offloading mindless and time consuming tasks. This obviously needs to be measured against the utility factor as some people enjoy these activities but working more for high income earners has an unbelievable payoff.

  7. Financial Freedom Countdown

    Sam, if you believe we are in a secular down trend wrt rates why even bother shorting. I do like your arbitrage example though and one never knows if the Fed raises rates to show it is independent of political pressure.

    BTW I like the western part of the city but having grown up in warmer climates I would prefer the Mission with no views.

  8. Another good example of arbitrage opportunities was renting out a few apartments and then listing them on AirBnB.

    A few colleagues in finance did this a few years ago and made multiple of the monthly rent that they had to pay. Unfortunately, regulations caught up with the industry and now it is significantly harder to AirBnB your rental without getting fined heavily.

    That is usually the case with most arbitrage opportunities. People catch on, competition grows, regulation comes in, and then profits erode. But if you can find one early on, you can milk it for years before it is over.

    1. Good example!

      Reminds me of driving for Uber in 2015-2016. Hourly rate was up to $40. Now it’s like $10, maybe less, depending on damage to your car and tickets etc.

  9. Amazon was selling a $548 camera lens for $250 on Saturday morning and it appeared to be a mistake. So i bought 4 of them – Turns out it was a mistake as they listed it back up to $548 later that day. Looked at eBay and they are trending used for $430. Should be able to clear $600 on this purchase. Nothing like some saturday morning Arbitrage.

  10. I love that story about you selling nerds for a profit in elementary school! love it. Finding arbitrage opportunities isn’t a strength of mine unless you count something simple like buying generic products instead of name brand. I’ll have to think of more ways in my day to day and with my investments. Great find on the CIT savings rate!

    1. Thanks. I wonder if this is a good anecdote that suggest nurture can help kids become money savvy? This Nerds candy arbitrage has stuck with me ever since the 4th grade. As a result, I’ve naturally looked at money money opportunities everywhere.

      Good call on generic. Formula the same, less money. I still buy the real stuff though for things under $20 bucks. Can’t help it.

  11. Sending my kids to public school instead of private school. I was kinda surprised you didn’t mention it. I know your child isn’t in school yet, but you have written several articles about this. All the children have and are receiving a fine education. We did have to move houses to a different neighborhood in the city for a better middle school (weakest part of our public school system), but paid less per foot then previous house. We also cut our commute time, and enjoy this neighborhood more than previous location. One of our best moves financial, and emotional.

    1. My bad. I thought my first arbitrage example was clear and assumed. I will make it more clear thanks to your feedback with more bold, and more examples. I also included the arbitrage of taking advantage of the much higher acceptance rates at the top Canadian universities, at the end of the article.

      1) Went to a public university for $2,800/year in tuition. I saw my older sister attend a private university for $22K/year and saw no noticeable benefit. In fact, attending a private university was probably a detriment because my parents didn’t make that much as government employees.

      The max arb was going to one of the cheapest public universities and then getting a job in one of the most lucrative industries. Even back in 1995, $2,800/year sounded like a bargain because I could cover the tuition working at my $4/hour minimum wage job.

      More than 20 years later, it’s funny to see that people still believe there’s a positive spread in attending a much more expensive private university than a public university. Unless you are already rich or have huge scholarships, please save your money and go to the best public school available.”

      Do you have any suggestions on how to make my points more clear? I know I need to work on clarity to better get my points across.

      Thanks for your suggestions!

      1. Actually college was totally clear to me I was thinking K – 12 education. Most of my friend pay 13 year of private school tuition instead of attending some very good schools in the city. Your million dollar article about private school education you did was outstanding.

        Thanks for the link to the Canadian university link. As a Canadian and US citizen wife and I have talked seriously about our children attending those fine and cheap universities! My niece is currently going to McGill in Montreal and is loving it. Since her father was born in Canada it is less than $12K room and board included. it is actually cheaper than instate tuition in California system, and significantly easier to get in!

        1. Ah, gotcha. Then I’ll include the K-12 as well. I do want to send our son to a public language immersion grade school in SF. But we face a lottery system, so even though the school is 3 minutes away by car, we might be forced to drive 35 minutes to a public school he gets into. That is unacceptable to us, and we will go private.

          I really think a household needs to earn at least 5X the annual tuition cost of a private school per child to be able to comfortably afford sending their kid there.

  12. Husband is a numismatist and he routinely buys old coins for almost nothing, only to sell them back to fellow numismatists for hundreds of bucks. He’s always kept a pretty good collection and, whenever we needed some money for important stuff (immigrating for instance) he sold some of the collection and we got cash to last us at least 6 months in the US.

    1. Oh cool! I guess we are numismatists too! I have a collection of ancient Chinese coins, many from the B.C. era. I collected them in 1997 when I studied abroad in Beijing.

      I actually LOST, or had them stolen… an extremely valuable portfolio of coins I saw at the British Museum of History! Oh my………………………….

  13. My online savings bank (Discover) has been slowly whittling away the savings interest rate, from 2.2% to now 2.0%. Citi seems to have a great opportunity still with those rates (if there is a likelihood of these rates eventually decreasing as money pours in, would it not be better to lock it in with short term CDs instead?)

    That is great that you took a speech by a Netflix founder to jump into Financial Samurai. I am sure many attendees did not take advantage of the information they were given.

    1. It took me 3 years after Reed’s speech to take action b/c I was “always too busy.” Busy is just an excuse to put off what you don’t want to do.

      But business school inspired me to think about building a business… b/c having a business, no matter how big or small would allow me to implement everything I learned. It’s been fun!

      Locking in a 12-month CD with spare cash at 2.2%+ is not bad, as online savings accounts are slowly going down.

      All about cash management.

    1. Hi Michela – If you are a newbie investor, I would never short anything. Instead, I would stay on the risk-free side of the trade and open up an online savings account that is providing a higher yield than the 10-year bond yield.

      Shorting theoretically has unlimited downside, and is only to be used as a short-term tactical strategy. You can short IEF, the 7-10 year treasury bond ETF by simply choosing Sell Short in the drop down menu of your brokerage interface. But if you hold the bond or security providing a dividend past a certain period of time, you will also have to pay out the prorated coupon/dividend as well.

      Keep things simple if you have no shorting experience by not shorting.

        1. Sure.

          Buy/deposit $1,000,000 in online savings account making 2.3%. Earn $23,000.

          Short $1,000,000 IEF at $113 (up from $105.25 at beginning of year, +7.3%). If the 10-year bond yield climbs back to 3.2%, IEF will likely decline to $99.9, for an 11.6% gain once you cover your short = $116,000.

          If the online savings rate stays at 2.3%, and this trade takes 1 year to play out, your total gain is 13.9% = $139,000. Not gonna happen like this, but this is an example of what could happen.

          If the 10-year bond yield climbs back to 2%, then IEF might fall to around $108-110 for a 2.5% – 3.5% gain.

            1. If you want, depending on duration of short.

              Send me some examples as well and we can discuss them. It’s better that it goes both ways.

              What are some ways in which you are arbitraging opportunity to make more money?

            2. FS,
              I have owned SFR’s outside the bay area. I am in the process of buying apartments as a general partner – hav some limiteds who are interested. I believe my returns should out perform Fundrise.

              I am a VERY long term investor. Do not index or buy mutual funds. Have owned stocks like AAPL, VZ, MSFT, NYT for 9-10 years. BRK even longer. Bought BAC and CRM 5 years ago. All of these have outperformed the SPY.

              The dividends from some of these stocks will cover the purchase price in 1-2 years.

              Savings ARB: Say I open an account with CIT with $250K earning 2.3% interest. Are you suggesting I short the IFE, $250K?

          1. FS,
            I am wondering if my calculations are accurate:
            Shorting the IEF at the opening last Monday and covering on Friday at the close would have yielded a gain of .91% for the five days the trade was active.

            The annually yield of the IEF is 2.25%, pro rated .0357% (2.25/63) for five days the trade. Why do I divide by 63 (365 days divided by 5 = 63)

            The gain without commissions and after paying the dividend =.874% (.91%-.0357), a whopping annualized gain of 55%.

  14. I think this counts as arbitrage. My W2 job was in a budget crisis. I offered to take a 30% pay cut and get off their benefits in exchange for taking on a consulting client. This allowed me to have two six figure incomes instead of one. Eventually, the budget crisis resolved. So had I not acted quickly I might have missed out on nearly doubling my income and getting to take advantage of a Solo 401(k).

    1. Great example! Going freelance is definitely a way to make way more money if you have the skills to do so. Why just get paid by 1 when you can get paid by 2 or 3 clients since nobody is working 8+ hours a day.

  15. 2.3% is very good. That’s a good place to stash some money if you have extra.
    I’m not very good at arbitrage. I think it’s pretty hard for most people to recognize the opportunity. Otherwise, everyone would be wealthy.

  16. I took my kid to a summer camp in another county. It was much cheaper and turns out the staff was better and they had more field trips than the more expensive one he went to last summer.

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