March 19, 2010
Pattaya, Thailand

My time here in Thailand is finally coming to an end, at least for now. On Monday morning, after I stop by the US embassy to pick up my renewed passport, I’ll be headed to Hong Kong.

I should briefly mention something about passports. Starting in 2007, the US government began manufacturing all new passports with RFID chips– small devices which record and transmit data.

Malaysia was actually the first country to issue RFID passports back in 1998; since then, most of the developed word has adopted them. The data which is collected/transmitted varies by country but generally includes some personal information as well as some travel data.

The RFID chips have a range of up to 10 meters, and many countries do not have encryption devices.

I’ve spent the last year searching around the world for an embassy in some remote country that hasn’t moved to RFID yet. Unfortunately, I was unsuccessful, so from now on I’ll be walking around with a passport that transmits my personal information.

My understanding is that there are passport ’shields’ available which absorb most of the transmissions, and I will definitely be looking into this more closely.

On to this week’s questions…

William says, “Simon, thank you for the IRA information this week. I know that Congress has changed the law– do you think that now is a good time to consider the new IRA structure? Can I use it to move my retirement funds overseas?”

Great question. First of all, I must apologize because this only applies to US citizens.

32 million Americans will need to make a decision this year; it’s a unique situation because, this year alone, there are several things coming together: first, the IRS has changed the rules, making it a smooth process to switch from a traditional to Roth IRA.

If you combine that with the devaluing rules, and the concept of an Open Opportunity IRA, you’re looking at a potentially enormous tax savings… but only for a limited time while the IRS keeps this window of opportunity open.

Also, once the structure is established, it’s really a fantastic vehicle for moving cash overseas, or even buying foreign property in many instances.

If you want to plant a flag overseas with your retirement savings, this is really the best way to do it, and the time to do it is now while you can still save on the taxes.

Sarah asks, “Simon- you stated that you would report on Malaysia. I’m more interested in establishing a non-US flag there than in Singapore.”

Malaysia is really a wonderful place… it’s Singapore without the costs, and Thailand without the chaos. I’ll dedicate a whole missive to it, but briefly here’s what you should know:

Malaysia is an easy place to plant a residency flag. You can stay in the country for 90-days without a visa, easily renewable for another 90-days. If you want to stay longer, the “My Second Home (MM2H)” program is one of the best economic residency programs in the world.

MM2H provides a 10-year visa for foreigners who meet basic qualifications– people under 50 have to deposit roughly $90,000 in a local bank, half of which can be withdrawn after 1-year for the purchase of a home. People over 50 need to deposit about $45,000 or prove a $3,000 monthly pension.

Like the Panama pensionado program, the MM2H visa entitles you to a variety of discounts and benefits with things like vehicle purchase and education.

The program is also very streamlined. Like Singapore, you can begin the application process online and check the status of your application on the government’s website, www.mm2h.gov.my

Ralph asks, “Dear Simon, Could you give us your opinion on the best country/countries to incorporate a business in? Thanks for your informative E-letters. Looking forward to the next.”

This is a tough one because it really depends on many factors– your home tax country, what do plan on doing with the new business, where you plan on living, etc.

In fact, the most important thing you should understand about offshore planning is that there is no “one size fits all” solution.

For example, a manufacturing company owned by a US citizen may want to look into Ireland because of the comprehensive tax treaty with the United States.

An IP holding company owned by an expat Australian, Brit or Canadian, on the other hand, may want to strongly consider Labuan, Malaysia. Malaysia has a tax treaty with Australia, Canada and the UK, but not the US.

In the Western hemisphere, a lot of people tend to look into Panamanian structures. For a passive holding company, this might make sense… but for an operating business, I would stay away from Panama because it’s not a common law country.

The bottom line is– always seek the right advice from a tax professional in your home country who understands proper overseas structures. I have contacts in the US and UK if you need.

Lastly, Libero asks, “Simon, you mentioned not so long ago about a special clause for Italian citizens somehow being able to obtain Panamanian citizenship. Can you provide more details?”

The governments of Italy and Panama signed a bilateral treaty several years ago that entitles citizens of one country to obtain RESIDENCE in the other… so an Italian citizen can obtain Panamanian residency, and vice versa.

This treaty only grants residency, not citizenship. To be clear, there is no fast track Panamanian citizenship program, at least not a legitimate one.

Panamanian naturalization is a long, difficult, and muddy process… I know some people who have been living in Panama and married to a local for 20-years, and they have been denied citizenship.

If you’re looking for second citizenship, I would suggest somewhere other than Panama. Try the southern cone countries that I wrote about a few weeks ago.

Have a great weekend.

January 6, 2010

Reporting from: Estepona, Spain

I’m sitting now in lovely Estepona, Spain– a coastal town on the Mediterranean that experienced a massive property boom over the last decade.

The community I’m in is anchored by a five-star Ritz Carlton golf resort, and surrounded on all sides by the mountains or the ocean.  Ancient military tacticians marveled at the defensibility of such a position and likely did not envision it being turned into a holiday hot-spot.

As the coastal region here is generally dry, warm, and nestled in the mountains, it’s ideally suited for me. I prefer clean places that are reasonably priced with great weather, access to major transportation, vibrant culture, and yes, a single’s scene.  Coastal Spain is all of these… but to buy now I would be overpaying. Here’s why:

When the credit bubble got underway earlier in this century, coastal Spain was overrun with foreign property buyers, and their easy credit inflated home prices.   Like other parts of the world, property values in Spain are now upside down in equity– the home is worth less than the mortgage balance.

This is bad news for banks, bad news for owners, but great news for cash buyers… as long as there is legitimate value.

Appraisers generally use three ways to value a property.

The first is the ‘replacement cost’ method, in which the appraiser estimates what it would cost to construct the unit from scratch.  Between 2003-2006, the industry was booming… most contractors were booked solid, and demand for materials and labor pushed up construction costs.

Today is a different story altogether; most contractors haven’t seen a payday in months, and material prices have plummeted alongside housing demand. You could now build one of these spacious 2-bedroom villas for around 100,000 euros, not including the land cost.

The second method is the market approach, in which a property is appraised at a similar price point to where comparable properties are selling. If a 2-bedroom villa with an ocean view recently closed at 400,000 euro, then your 2-bedroom villa with ocean view can likely sell for around the same… in theory.

The problem with the market valuation is that it is highly susceptible to the irrational exuberance of the market’s participants.  Remember, at the end of the day, markets are simply comprised of emotionally charged individuals… they experience fear, euphoria, anxiety, and impatience, and these emotions skew market valuations.

Throughout history, markets have historically proven that they are terrible indicators of value: loss-making tech stocks traded at infinite valuations, small shacks in California sold for millions of dollars, and debt-free mining companies were valued at less than the cash they had in the bank.

None of these passed the common sense test.

Furthermore, here in Spain, the property market has essentially dried up.  Most of the owners have adopted a ‘wait and see’ approach, foolishly believing that if they wait around long enough, price will eventually return to their highs.

This idea is totally absurd. Japanese equity investors are still waiting for the Nikkei to return to its 1989 high of 39,000. Today the Nikkei is still shy of 11,000… so I guess those investors will just have to keep waiting.

Home prices here in Spain won’t start appreciating until the prices are cheap enough to entice buyers.  There is no magical timeframe that will suddenly turn around home prices; if sellers refuse to sell, and buyers refuse to buy, then the market can theoretically remain in a stalemate forever… which leads me to…

The third valuation approach is the income method. For an investor, this is the only thing that counts: What is the investment return I can achieve with this property, and is that investment return adequate for the level of risk that I am taking?

As an example, when I was in Southern Italy over the holiday, I went scrounging around my local family’s neighborhood looking at property.  I found that the going rate for a modest 2-bedroom home was 220,000 euros.

Then I found out that the same home can be rented for about 450 euro per month.

Some quick, back-of-the-envelope math suggests that, after deducting reasonable amounts for vacancy, maintenance, insurance, and utilities (Berlusconi eliminated property taxes), the net operating income would be around 4,200 euro per year.

If the home is bought with cash, that amounts to a whopping 1.9% yield, roughly the same as a much lower risk Certificate of Deposit.  The risk adjusted return on these properties is clearly unreasonable.

I’m seeing the same thing in Spain right now– villas rent for a pittance, but property owners are stubbornly sitting on their asking price, not budging.

Eventually, external pressures will force sellers to capitulate– most won’t be able to continue making their mortgage payments, and others will be so desperate to raise cash they will finally slash prices.

When this happens, prices will drop and yields will rise. I think the time to jump in is when yields comfortably reach double digits and outpace less risky asset classes by a wide margin.

Buying foreign property makes a lot of sense; maybe Spain is for you, maybe it’s not… but you should strongly consider planting an overseas flag, and I recommend using this valuation method to determine your entry point.

I’m sitting on a sunny terrace overlooking the Gulf of Taranto in Italy’s southern Puglia region, and it’s absolutely spectacular. If the world goes to hell in 2010, this will be on my short list.

Puglia is Italy’s breadbasket– staple crops here grow like wild flowers due to the temperate climate and rich soil. It hardly rains here (this is a plus for me), yet ground water is abundant, so it’s fairly easy to yield quality crops.

Plus it’s cheap, especially by European standards… land costs, food costs, living costs, etc. are well below the Italian average, which is well below the Western European average.

The region also produces some of the strongest, most exquisite grapes in Europe. The better known Tuscan wines often fortify their blends with ‘Pugliese’ grapes, and I’m convinced that this area will become the next ‘it place’ in the wine industry.

History buffs will love it too; Puglia predates the Roman Empire as it was conquered and settled by the Greeks. Many of the Pyrrhic War’s major campaigns were fought here, so it’s an amateur archaeologist’s paradise.

Do yourself a favor– if you’re looking for an ‘off the beaten path’ Italian vacation, go take the picture at the Coliseum, then head south to Bari and Taranto.

In full disclosure, I may be a bit biased because I have local family here and have been coming for years. In fact, I’ve flown my parents here with me this week to spend some time relaxing and soaking up the flavors.

As such, this will be my last letter for the rest of the year barring a major catastrophe or financial cataclysm. Before I sign off, though, I wanted to tell you what we have in store for next year.  I think you’ll be pleased for what we have planned.

2010 will likely be a tumultuous year, full of ups and downs. Afghanistan will likely get worse, commercial real estate will burst, US state and municipal budget crises will come to a head, and there will probably be substantial rioting and political instability in many parts of the world.

On the other hand, the world will also witness the unleashing of the Asian consumer, increased wealth in emerging resource-rich nations, and, hopefully, a forcible restructuring of many political systems. 

With each passing change in the world, a host of new opportunities will arise from which we can benefit both personally and professionally. I remain committed to living a multiple flags lifestyle, finding as many of these opportunities as possible, and writing to you about them each day.

At its core, Sovereign Man is intended to provide real, actionable solutions to the growing problems faced by people who ‘get it.’ These solutions include things like investment opportunities, international banking, overseas business opportunities, tax strategies, networking, expatriation, better privacy, etc.

In 2010, you’ll be hearing much more from me about living a multiple flags lifestyle– specific second passport strategies, the best places to buy property, and detailed banking information that you won’t find anywhere else.

I also plan on making the site more interactive; I would like Sovereign Man to be a community so that subscribers have the opportunity to speak directly to each other and exchange personal insights. We’re working on a prototype right now and definitely plan on rolling it out in the first quarter.

Most importantly, the site, the subscription, and the new interactive service will remain absolutely free.

I’ve received a lot of emails from subscribers wondering why I give away such valuable information for free every day. Easy. Because I want to. After all, I’m not a ‘newsletter guy,’ I’m an investor and entrepreneur who writes about how I’m investing and what I learn as I travel.

Moreover, since its inception, this letter has proven to be a fantastic conduit to meeting very interesting, like-minded people. As you’ve heard me say before, it’s all about ‘who you know,’ and I have made some spectacular relationships through this letter so far. 

I look forward to making even more in 2010, and continuing our discussion then.