On Puerto Rico

Dear Senderos,

Last week, with the dust from our European trip still fresh on our boots, we hopped on an early-morning flight to Puerto Rico for a reunion with a group of fellow owners at La Estancia de Cafayate, two of whom are temporarily making Puerto Rico their home for tax purposes.

As there has been a lot of interest in Puerto Rico of late, I will dedicate this issue to my observations on the place.

Before doing so, however, a couple of caveats.

First, as this was my first trip to Puerto Rico, I have no basis of comparison as to whether the place is moving in a positive or negative direction.

Second, we were on the island only from midday on Sunday through Wednesday, meaning my views must be considered as being of the “drive-by” variety.

With those caveats noted, and with the headphones blaring a set of music I put together on YouTube, here are my observations…

On Puerto Rico

Among a certain crowd, Puerto Rico has become something of a promised land.

Located a relatively short four-hour flight from a number of major US hubs, with no immigration or customs to impede your progress (Puerto Rico officially being a territory), the island offers a quick getaway from the winter blues.

And something more.

In addition to sunshine, a special tax treaty with the US makes residency very advantageous to the “certain crowd” just mentioned. Namely individuals with significant capital gains or income from selling products and services from Puerto Rico-based corporations.

Here’s an article from the International Man on the specific advantages. While there is a pitch for a report on the topic at the end, the quality of the work is good, so I have no problem sharing.

For the time-pressed, the big picture is that, as a resident of Puerto Rico:

  • You pay no capital gains tax.

  • Because of Puerto Rico’s territory status and special arrangements related to that status, you pay no US federal income taxes.

  • Instead, you pay only 4% on any income generated abroad. Thus, as a newsletter writer working in Puerto Rico and selling your newsletter off the island, you’d pay only 4% on the income generated.

While the advertised tax burden may be lower, according to a knowledgeable source, you can expect your income-related taxes to ring in at a total of about 12%.

Given that US citizens with even a modest level of financial success now pay upwards of 50%, Puerto Rico’s tax advantages can be considerable.

Of course, in order to reap the tax savings, you have to be willing to actually live there.

If you were reasonably happy in your current residence and the financial gain were, say, $1,000 per annum, I doubt you’d make the move. Certainly not for the tax savings.

But what if the annual savings rang in at $100,000? $200,000? $2 million? More?

At the lower end of that spectrum, the savings might cover most of your living expenses, allowing you to dedicate those funds to savings instead. For a young entrepreneur without firm roots and looking to build a nest egg, that incentive has to be fairly compelling.

At the higher end of the spectrum, the decision to move to Puerto Rico for the tax savings might require additional deliberations. After all, if by moving to Puerto Rico you could save $2 million a year, you are likely already a wealthy person.

In which case the deliberation would revolve around questions like, “If I already have more money than I can reasonably spend in a lifetime, is moving to Puerto Rico going to be a net gain in lifestyle?”

Speaking from the perspective of someone who is reasonably well off, you couldn’t pay me to live in Puerto Rico.

I wouldn’t do it for $1 million a year, or even $5 million.

Not even for a year.

Problems in “Paradise”

With that warm-up, here are my observations on life in Puerto Rico. In no particular order…

Weather/Drought

As you might expect for an island located in the Caribbean, the weather is hot and humid. Worse, it is hot and humid all year round.

Specifically, the average daytime temperatures in Puerto Rico are over 83 degrees all 12 months of the year and exceed 85 degrees for nine out of those months.

Personally, I can’t stand air conditioning, but living without it is not an option in Puerto Rico.

Another unpleasant side effect of the humidity is that it encourages mold to grow. According to a friend living there, if you don’t pay attention and take care, the mold will “take back” your closets… leaving green stains on your clothes and fuzz on your shoes and other leather items. As I am highly sensitive to mold, this would be a big problem for me.

Surprisingly, given the humidity, the country is in the grip of a serious drought. So much so that draconian water rationing is in place: for much of the island, the tap water is turned on for only two out of seven days each week.

Apparently, lacking a serious rainfall, a large part of the island will completely run out of water within the next 60 days. Yikes.

Traffic/Roads

As our trip to Puerto Rico took place in the summer off-season, the crowds and the automobile traffic were supposedly much reduced.

Even so, every time we set out, we ran into traffic congestion on the two-lane highways. Especially leading in and out of San Juan, where the traffic barely moves for long stretches, resulting in delays of 30 minutes to an hour on what would have otherwise been a short drive.

In addition to too much traffic trying to move on an inadequate number of lanes, the road surfaces are a big part of the problem in that they are riddled with potholes.

And not the “whoopsy” sort of potholes, but rather the “Goddammit!!! What the HELL was that?!” variety.

There are so many potholes, it is impossible not to hit one with jaw-jarring, tire-wrecking consequences on pretty much every trip. Leading, in a classic example of a vicious cycle, to the constant presence of work crews trying to repair the roads—resulting in yet more closed lanes and traffic delays.

When I consider how bad the roads are in the off-season, I can only assume that they would be positively torturous in the high season.

People

While we met a number of warm and friendly people, for example in customer service and the hospitality businesses, it was impossible to miss the poor attitude among the broader labor force.

Being accustomed to exchanging friendly greetings while going around the golf course at La Estancia de Cafayate, I waved cheerily to the course workers in Puerto Rico and got either a surly nod or nothing at all in return.

This attitude, of course, is not unique to Puerto Rico but endemic throughout the Caribbean where many locals act as if the tourists are somehow doing them wrong by visiting.

Well, that’s all going to change with the re-opening of Cuba.
Before Cuba closed down in the early 1960s, it was the “go-to” tropical vacation spot for the American public. By contrast, the rest of the Caribbean was the sparsely populated and rarely visited backwater depicted in Hemingway’s Islands in the Stream.

With Cuba re-opening, the surly citizenry of the Caribbean will soon find themselves with only each other to be surly to.

Again, this is a drive-by observation and, worse, a generalization.

However, I have spent enough time in the Caribbean to recognize the attitude, and there’s no question in my mind that the social stress lines between the locals and the “Pinkies” in Puerto Rico are firmly entrenched.

Crime

There’s another problem Puerto Rico shares with the rest of the Caribbean: the tendency towards crime. Which is kind of ironic, given how small the islands are.

One startling statistic is that the annualized murder rate in Puerto Rico is 26 per 100,000 population. That compares unfavorably with even the most dangerous cities in America. For example, Chicago has a murder rate of 10.4. New York City’s is just 2.5.

That’s not to say you are likely to get gunned down randomly on the streets of San Juan: as is the case throughout the Caribbean, most of the murders occur as a result of crime gangs fighting for turf.

Even so, there is no denying the crime present. One UN study shows that while the Caribbean is home to only about 8.5% of the world’s population, it is responsible for 27% of the world’s crime.

That said, unlike Costa Rica where virtually every home and business has walls topped with razor wire, in Puerto Rico that’s the exception, not the rule. The way I look at it is that if the people who live there don’t feel the need to turn their homes into mini-fortresses, then things are still reasonably safe.

Even so, as you drive around, it becomes clear that foreigners and Puerto Ricans of means prefer living in closed communities with heavy security. The place we stayed in required passing through two separate security checkpoints. While on the golf course, I was surprised by an armed, camo-wearing guard patrolling on an ATV.

And in San Juan proper, there are heavily armed police in evidence here, there, and everywhere.

US Government Presence

I prefer my government to be very limited in scope and to reside quietly in the background, to be called upon only when a specialized service such as protecting the nation from direct attack is required.

Unfortunately, that is no longer the case in the United States and in areas where its influence looms large. In those places—and Puerto Rico is very much one of those places—you are confronted with constant reminders to step carefully because Uncle Sam is in charge.

Of course, if you don’t particularly care about such things and are just looking to strategically locate for tax or lifestyle purposes, then this particular point will be of no concern to you.

Personally, however, one of my overriding goals for internationalizing my life was to put space between me and a constantly meddling government. One of the great pleasures of living in Argentina, as we do for most of the year, is the complete absence of any government.

That’s because while Argentina’s government has many issues, those don’t extend to harassing visitors about much of anything. As I have written before, if I tallied up the amount of time I personally spend dealing with the Argentine government—or even worrying about it—it would come to less than an hour a year.

That said, unlike the US, I suspect if you got into a spot of trouble in Puerto Rico, looser standards about such things would probably allow you to walk free on minor offenses for a certain reasonable compensation paid personally and on the spot.

The same mores and standards would probably apply further up the legal feeding chain as well.

Economy

As has been widely broadcast, Puerto Rico’s economy is in shambles. Yet, there is probably a lot more going on behind the scenes than is suggested by the headlines. How else to explain the presence of the mega-malls we passed on the one-hour drive from the airport to our destination on the other side of the island?

With only 40% of working-age residents officially employed, one must assume there’s a fairly robust black-market economy that starves the government of revenue, much the same as in Argentina.

One interesting fact about Puerto Rico is that tourism makes up only about 7% of the island nation’s GDP versus the Bahamas, where it accounts for over 60%. One reason for that, I was told, is the presence of a number of major manufacturing facilities attracted by tax incentives.

Rather than going on about the economy—foolish, given the small amount of time we spent on the island—here’s a link to a white paper sent to me by former Casey editor Alex Daley, who is living in Puerto Rico.

Even so, I think it worth mentioning that signs of a poor economy abound. In addition to the abysmal condition of the roads, the papers are full of foreclosure notices, commercial buildings are shuttered, and entire buildings in the mid- to upmarket condo developments are unoccupied.

Basically, outside of the manicured gated communities, the place is a shambles.

Lifestyle

At the beginning of this posting, I provided two caveats.

On reflection, I’d like to add a third as it clearly colors my perspective. And that caveat is that, as a result of growing up in Hawaii, I’m no fan of island life.

For me, there are two big problems with island living. The first are the geographical limitations. In the case of Puerto Rico, a drive across the longest part of the island would take you only about two hours (depending on traffic).

The second is that island life typically revolves around a beach culture with not a lot else to do. As my tolerance for lying about on beaches runs to about one hour a month, clearly that holds no appeal.

We stayed in an area called Palmas del Mar, a sizable collection of condominium developments clustered behind security gates.

Even if I were a beach aficionado, I would have been most disappointed. That’s because tidal action has pretty much wiped out the beaches in the area where we were staying. Adding insult to injury, what’s left of the shore is covered in heaps of rotting seaweed.

So, if the purpose of my visit had been a beach holiday, I would have ended up having to settle for a pool—which are available anywhere. (I am sure, or at least hopeful, that better beaches exist elsewhere on the island, but if they do, there’s a good chance they are crowded and, per the crime stats, magnets for petty criminals looking for opportunities to break into cars or worse.)

Tourist attractions?

I didn’t tour the forts in Old San Juan and have heard mixed reviews—some glowing, some so-so. Regardless, as a reluctant tourist who has seen enough stacks of rocks from antiquity, I am sure my review would have logged in at the bottom of the scale.

One interesting activity we ventured out for was to kayak at night into a “bioluminescent” bay. I have never kayaked at night, and I rather liked that part of it. The downside, however, was that rather than quietly gliding through the mangrove swamps in the company of a few friends, we proceeded to the bay single file in the clattering company of a hundred or so fellow touristas.

And, on arriving in the bay, we found almost no bioluminescence (but did find a lot of dead fish). The guide apologized for the letdown while asking us to “like them” on Facebook, blaming the near absence of bioluminescence on the seaweed.

My reliable local source tells me that, seaweed or not, the bioluminescence of the bay has all but gone. Meaning the tour operators are at worst running a scam and at best are milking the teat of a nearly dead cow.

Regardless, for a prospective resident, tourist sights are of little importance because they would not factor into everyday life.

As far as I can tell, other than playing golf or tennis—again, activities you can do pretty much everywhere, and perhaps a lot more comfortably given the hot and humid weather—there isn’t a lot going on.

In addition, the things I find important for a high quality of life, like good restaurants, are sorely lacking.

And, per above, even if you were able to find some activity outside of your gated community you enjoyed, each time you ventured out on the island’s poor roads would mean putting your life on the line.

Seriously, if I were to move there, I can’t imagine how I’d spend my days other than shuttered away in an air-conditioned box.

In Conclusion

When you get right down to it, the overarching goal for most of us as we travel through life is to allocate our time and resources in a way we think will provide us with the greatest level of personal happiness.

While there are times we have to make short-term compromises in order to achieve a long-term goal, one must be careful about those compromises as they have a way of becoming deep ruts that, with age, become hard to climb out of.

Then there is the basic matter of mortality. I know far too many people who wake up one morning at the top of the world, then wake up the next with their lives shattered by the discovery of some dread disease, or altered dramatically by some unforeseen event.

I value my life far too much to alter my path merely for the sake of money.

Especially in that I have found my personal paradise, Cafayate. In addition to near-perfect year-round weather, a rich culture, happy and energetic people, high-quality food, and virtually no crime, the place has the added advantage of being very inexpensive for a dollar-based individual. Thus, the money we have should last well past our lifetimes.

That said, if I were a young entrepreneur involved with a promising business start-up and looking to bank some capital, I might consider tucking into the aforementioned air-conditioned box in Puerto Rico for a few years.

But that is pretty much the only circumstance under which I would move to Puerto Rico—because, really, life’s too short.

Apparently even the locals have come to the same conclusion, because in each year since 2006, about 1% of the population has packed up and moved elsewhere.
Not to overly stress the point, but again, these are drive-by observations. The only way to actually know Puerto Rico is to experience it for yourself, and that requires hopping on a plane, which I would certainly encourage you to do.

Maybe something about the place will resonate with you, but it would be something that will have escaped me entirely.

A Travel Tip

In a recent posting, Lessons from the Trail, I shared some thoughts on becoming a smarter consumer of rental cars. I would like to close by stressing one point in particular.

When renting, this time from Hertz where I signed up as a Gold Club member to avoid time in lines, I chose the option of refilling the tank myself before returning the car.

However, as we approached the airport, there were zero service stations in evidence, so we decided to return the car “as is,” having used only about one-third of the tank.

Imagine my surprise when I was handed a bill of $72 for the gas shortfall… a refilling charge of close to $10 a gallon.

As I said in my original posting, I have come to view rental car agents as akin to “telemarketers” looking to skin you of every dollar they can. This experience merely confirms that opinion.

Yes, I should have read the fine print, a mistake—like renting from Hertz—I won’t make again.

And with that bit of grumbling, I’ll sign off for the week while wondering what the global markets are going to do next.

One friend, a specialist in technical analysis, believes the tea leaves may now be lining up for a 1929-style crash.

While anything is possible, I remain interested in building long-term positions in high-quality Chinese stocks, but only with seriously stinky bids—20% below current prices seems about right.

Until next week…

David

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