A friend told her to catch a flight to Puerto Rico, she didn’t know why, but she bought her ticket anyway. When she got there she discovered the ENORMOUS tax incentives to move her business down there. Who wouldn’t want to save money while living in the Caribbean? Listen to Kira tell us the pros and cons of moving her business to Puerto Rico.
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Kira Golden Real Estate Background:
-CEO of Direct Source Wealth, a Real Estate investment company
-Her company generates passive income and grows the wealth of their investors
-Internationally known speaker on the topic of deal structure, underwriting, fundraising, real estate investing
-Based in Puerto Rico
-Say hi to her at directsourcewealth.com/joefairless
-Best Ever Book: Baby Wise
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Kira Golden. How are you doing, Kira?
Kira Golden: I’m doing well, thank you for having me here, Joe.
Joe Fairless: My pleasure, nice to have you on the show. A little bit more about Kira – she is the CEO of Direct Source Wealth. Her company generates passive income and grows the wealth for their investors. We’ll get into the specific here in a little bit.
She is an internationally known speaker on the topic of deal structure, underwriting, fundraising and real estate investing in general. She’s based in Denver, Colorado, and you can say hi to her at her company website, which is DirectSourceWealth.com – that’s in the show notes page.
With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Kira Golden: Sure, yeah. I’ve been doing real estate since I was 18, so it’s pretty much what I do. Having done it for that long and through a couple of recessions now, I’ve done lots of different things… But right now our main focus is on multifamily value-add properties. In general, we are working on building a platform that gives investors access to diversified holdings, asset class and geographically. We move where the market tells us to move, but we also keep an eye on making sure we’re diversified.
Joe Fairless: With the general thing, where you’re building a platform for diversified holdings across geographies and asset classes, how do you structure that? Is that a fund that you’ve created?
Kira Golden: No. My focus has been – and this is why our name is what it is, “Direct Source…” – on direct investments; it’s sort of an ideological thing for me.
There are funds out there, there’s funds that are run really well, and there’s reasons to do them, but I’m a big believer in the opportunity to be a direct investor. I think that structure lends itself better to people knowing what they’re invested in, having a personal connection to it, and therefore making better, smarter decisions with their money… Whereas when you’re in a fund, you’re just another step removed from what you’re investing in, and that can lead to wonky decision-making in certain circumstances.
Joe Fairless: So they’re investing not in a fund, but rather each deal is its own entity and they’re investing in a particular deal… But you’re on the general partnership side, and they’re on the limited partnership side and they’re investing passively – is that correct?
Kira Golden: Precisely.
Joe Fairless: Okay. So your company is based in Denver, Colorado.
Kira Golden: Actually, in 2014 we relocated into Puerto Rico. I’ve gotta update that information you got about Denver. We do have stuff in Denver, but the corporation and our headquarter is actually down in Puerto Rico now.
Joe Fairless: How come?
Kira Golden: Tax structure is really what brought us down here originally, and I moved down here in that timeframe as well. I’m based down here, most of our employees are down here, largely due to the [unintelligible [00:05:27].21] tax incentives that were issued by the territory of Puerto Rico.
Joe Fairless: Please elaborate.
Kira Golden: [laughs] It’s actually kind of a fun story, and I’ll give a shoutout to the CEO of iPlanGroup, the IRA custodian Jill Banner. She called me a few years ago now and said “Kira, come to Puerto Rico.” She’s one of those people when they say that, you just book your ticket and then ask them later why… So I did.
24 hours later I was down in Puerto Rico with her, we were being toured around and they were teaching us about the tax incentives. All residents of U.S. territory are tax exempt from federal income tax; this is just a U.S. statutory code. Obviously, someone needs to talk to their tax professional to understand the details of that, but that’s just my understanding of the way it is.
Then usually people don’t just pick up and leave the States, because when you move to the U.S. territories, their local tax is pretty expensive, so there’s not really much of an incentive to do that.
Puerto Rico, in an effort to attract investors and entrepreneurs, people with investor mindset and mentality to create jobs and opportunities for Puerto Rico also pass a tax incentive that allows you people who moved down here who have lived in Puerto Rico for (I believe) the last 15 years, to relocate down to Puerto Rico, and also the opportunity to relocate their business down to Puerto Rico, and then you pay 4% corporate income tax on your corporations, and you pay 0% income tax on capital gains, dividends, interest income – basically, passive income sources. That’s a 20-year decree, it’s a formal contract between me and the territory of Puerto Rico, and my company in the territory of Puerto Rico.
Joe Fairless: Wow… Just for the listeners who don’t have the context, 4% corporate tax and 0% income tax on passive income – what were you paying?
Kira Golden: It depends on exactly what I was being taxed on, but it would range anywhere between state territory and local — anywhere between 30% and 55%.
Joe Fairless: [laughs] Normally, taxes are the number one expense, but not if you live in Puerto Rico, apparently.
Kira Golden: Correct!
Joe Fairless: Yeah, that’s incredible. What has been the two most challenging aspects of transitioning from the States to Puerto Rico?
Kira Golden: We do have some real estate projects down here, and the challenge there has just been an exorbitant number of vacations that Puerto Ricans take… Things that should take two weeks take six months. It’s a little harder to motivate people on an island to get things done, but I will say Puerto Rico, of all the islands that you could choose from, is the most business-minded location in the Caribbean, in my experience. But it’s still been a challenge.
And then sort of on the personal front, I was in one of the first 200 people to make this move, so when I first got here there really wasn’t a community; now there’s thousands… And there’s a couple of communities around the island that are high, high-level real estate people. You walk around the beach in Dorado and you trip over hedge fund managers. We all sit around and talk about how someone’s got a billion dollar fund, and someone else has got real estate deals, and we get to talk and network between kite surfing… It’s become really great, but at first that was the challenge.
Joe Fairless: Talk to us about the deals that you have in Puerto Rico.
Kira Golden: My interest down here is the vacation rental properties and things that we’re doing on VRBO, Airbnb, and we do the traditional marketing with it, too – Expedia and [unintelligible [00:08:59].13] and travel agents and all that.
Basically, we bought some bank notes on defaulted assets. Many people probably heard the Puerto Rico banking situation; that situation isn’t so great, but that creates an opportunity.
So we’re buying defaulted bank debt and then going in and fixing up condos and then renting them out as vacation properties.
Joe Fairless: Can you give us the numbers on a recent project, just so we get an idea?
Kira Golden: We purchased a note for a million dollars; it was 30 condos. We put a bunch of money into it. Our total cost came out around 3.8. It appraised right after we bought it for 5.4. It’s been a couple years now and I recently had it appraised in the mid sixes. So a significant equity growth very quickly, but really even better than that are the cash-on-cash returns. On properties that are producing cash flow we’re seeing 18%-25% unlevered cash-on-cash returns. Then after having a few years of track record of cash flow, we have the opportunity to try to go to the banks and get these refinanced.
I will say one of the challenges in Puerto Rico is that the debt makers really have no place to sell the debt, so it’s very hard to get capital in that structure, so we’re doing a lot of cash deals for now… But eventually those will be able to be refinanced.
If you’re at 20% unlevered cash-on-cash return, that’s 50% basis of value.
Joe Fairless: Yeah, that’s a good position.
Kira Golden: It’s good. You have to be patient. Puerto Rico is not something where — if you gotta cash out for your kid’s college fund in six months, don’t do a deal in Puerto Rico. But if you’re in your thirties and you’ve got time, and there’s opportunity, or forties, or fifties, it should be a really great opportunity right now.
Joe Fairless: Did I hear you right, you paid $30,000 for a note?
Kira Golden: No, 30 units; we paid a million dollars. The original note was just over five million, and we bought it for a million bucks. We got 30 units, and our total cost basis after we did repairs, improvements, carrying costs etc. was about 3.8.
Joe Fairless: Oh, okay. Then it appraised for 5.4 and now it’s in the mid sixes.
Kira Golden: Yes.
Joe Fairless: And in what period of time?
Kira Golden: The appraisal was instantaneous, and then we saw the other [unintelligible [00:11:13].22] about two years.
Joe Fairless: That’s incredible. What would you attribute that to? That’s a general question, you can take that whichever way you want… Maybe how you got the deal, or the value increase, how you were able to get that equity at closing – that sort of thing.
Kira Golden: The same thing that we were all doing in 2008 in Phoenix. Puerto Rico is no different. The margins just happen to be about 8-10 years behind. I’m not a genius, it’s just rinse and repeat in a new location, the same thing you did before somewhere else.
Phoenix in 2008 – you could go to the banks who were trying to [unintelligible [00:11:49].02] that off their books, and if you had cash, you could buy bank notes for anywhere from 20 to 50 cents on the dollar. Puerto Rico is there. It’s not as much there as it was three years ago, but it’s still clawing its way out.
Unlike in the States, where the banks were not allowed to fail, and our banks were all sort of propped up and protected, Western Bank in particular, but a number of banks in Puerto Rico were allowed to fail. That forced all of their debt that they were carrying — think about this… You’re the bank that made all the worst mortgages. You just were writing mortgage checks like nobody’s business, and then when the market corrected and compressed, you failed. Then all that paper was forced onto the banks that were strong and solvent and survived, which started to weigh them down.
So they’re trying to sell that paper, get out from under it, and they had to take that down, but they didn’t make the original loan, so they didn’t have any money out on the deal, so they’re super motivated to just get rid of that debt and not have to service it and not have the liability of foreclosing on the asset.
Basically, you’re going in and you’re sharing with the bank, doing the workouts — it’s all the same stuff we all learned how to do ten years ago, we’re just doing it in Puerto Rico.
Joe Fairless: Any unique challenge with doing the same process in Puerto Rico that comes to mind?
Kira Golden: Yeah, I mean there’s definitely some cultural stuff… If you think about it, this is a U.S. territory, so there are some people — Americans are not exactly… It’s not hostile by any stretch, but we’re the occupiers, so we don’t come in and necessarily get a whole bunch of “Yeah, let’s give you our land, let’s give you our real estate! This sounds great!” That’s not really the environment you walk into.
You’ve gotta be an open person, you’ve gotta be able to trust and respect, and learn a little bit of Spanish to try and connect with the people. It’s a really warm, wonderful culture, really warm, wonderful people, but if you come in thinking you’re the imperialist, it’s not gonna go very well.
Joe Fairless: Most people – for better or worse – don’t have the mindset that you have where you picked everything up and you moved to Puerto Rico. Have you always been that way?
Kira Golden: Yeah, actually when I bought my first house in Arizona – I was living in California, I had never lived in Arizona; I just couldn’t afford California… And when I closed on the house I was actually in France for the summer. So I bought my very first house, signing my loan docs at a notary in Marseille, from the beginning. That’s the way it’s always been.
Joe Fairless: So has there been any disadvantage to living in Puerto Rico and investing in the United States as it pertains to investor relations?
Kira Golden: It’s hard to measure for sure. I certainly get the question “Are you a Puerto Rico corporation? Is that like being an offshore company?” We get that question, and if I’m getting that question, that tells me there’s people who are just not asking it, and they’re going to the next website… Because if people are asking it, there’s some that aren’t even bothering to ask it, so there must be some impact. But I would say most of the investors we have have come through referrals and existing relationships, or people who know us through an education platform like a podcast like yours, or something like that… So I don’t think it’s significantly a hindrance, but I think I’d be naive to say there’s no impact.
Joe Fairless: You said your main focus right now is multifamily value-add properties. What’s the latest project you’re working on?
Kira Golden: Well, we’ve got a couple of active deals. We’ve got a full rehab of 351 units in Dayton, Ohio that’s gonna be done probably in February… We took that thing down to the bricks and we’re rebuilding it. Then we have a couple of properties in Phoenix, an acquisition we just did… It’s something like 20 units; I don’t know the exact number. It’s about 80% occupied and we’re doing kind of a tenant replace and stabilization on that. It says it’s 80% occupied, but I’d say it’s about 70% actually occupied, i.e. people who pay for the privilege.
Joe Fairless: Oh, I know, I’ve experienced that, believe me… [laughs]
Kira Golden: There is a difference between a warm body and a paying body.
Joe Fairless: Yup.
Kira Golden: And then we just closed last month on a project in Phoenix which I’m super excited to say we actually bought for about $15,000/door under the next least expensive property in the area, but we bought it 100% occupied, and right next to the college. It was a good acquisition and we’re in the process of getting that one going.
So those are what we have actively [unintelligible [00:16:29].05] then we’ve got a bunch more coming down the pipe. We’re working on some vacation rental properties in Vancouver, we’ve got some stuff in Denver, I’m gonna be heading out to Australia to go look at some vacation properties, we’ve got more multifamily properties coming up in Orlando…
Joe Fairless: Let’s talk about the Phoenix one… You said it’s 80% physical occupancy, or economic?
Kira Golden: Physical occupancy.
Joe Fairless: Okay, 80% physical occupancy… And how many units?
Kira Golden: Let’s say right around 300. I don’t know the exact number.
Joe Fairless: Right around 300… When did you buy it?
Kira Golden: We closed September of last year.
Joe Fairless: And what did you buy it for?
Kira Golden: It was that when we bought it, and we bought it for just around 14.
Joe Fairless: 14 million, got it. What type of financing did you get on that?
Kira Golden: Freddie Mac debt.
Joe Fairless: Wow. With 80% occupancy…?
Kira Golden: It was probably actually closer to like 85%, something like that. I remember that was actually a question, because we had to go through all the leases and really double-check, because we were like right on the cusp of what they were comfortable with.
Joe Fairless: So what’s the business plan with this one?
Kira Golden: In addition to just kind of better operational management… It was an owner-managed property, so definitely we’re improving the management… Turning over the tenants, getting better quality tenants, and then doing a value play overlay on the underlying property in terms of we have a program where we’re going in and we add — I don’t know exactly… It’s just kind of newer so I’m struggling to explain it, but basically we add [unintelligible [00:18:02].18] in addition to the rental income to the properties to increase the NOI.
A common one, for example, maybe a lot of property owners will go out and they’ll work out something with Time Warner and they’ll get a revenue split to provide internet, or maybe they’ll do something with the insurance company to get a revenue share on the renter’s insurance – different programs like that… So we have sort of a proprietary blend of seven different programs that we bring into our properties that can [unintelligible [00:18:29].18] the NOI anywhere from 10%-15%.
Joe Fairless: And how long do you plan on having the property.
Kira Golden: Until my sons, kids finally decide to sell it.
Joe Fairless: [laughs] So a while…
Kira Golden: Yeah, we’re buy and hold. I still own that very first house I told you about that I closed on in France. I did fix and flips for a while there when the market really demanded it, but I’m “Buy and hold, build that cash flow, structure your debt right, get your cash out, do again.”
Joe Fairless: Then the question becomes if it was 14 million all-in, did you and your family put in the equity, or did you partner with investors on this?
Kira Golden: Our group of co-investors took this on collectively.
Joe Fairless: You and your investors?
Kira Golden: Yeah. I had my cash in the deal, and actually you also have my family — my mom invested a little in this deal, too; I hope that she doesn’t mind me saying that. So I do have family that invests with me, but we also work with investors who’ve been doing this with me since I was 18, and some that have kind of come along over time as we’ve gotten to know each other… Sort of friends and family.
Joe Fairless: So with the passive investors who are investing with you, obviously you tell them at the beginning “Hey, I’m gonna hold this forever. We’re never gonna sell.” How does that work when you talk to them about it? What’s the feedback?
Kira Golden: We definitely are looking for a particular type of partner. We’re not trying to be all things to all people. To some that doesn’t work, and we’d rather get to that right away, but generally it’s pretty good feedback. There aren’t a lot of companies… The typical offering seems to be a 3-5 year target hold period, so we end up connecting with people who think like we do, and who are more interested in just “set it and forget it.”
My perspective is that the transactional piece – the broker fees, the acquisition costs, the underwriting costs really diminish the returns over a 10, 15, 20, 30-year holding period. So if you can reduce that and you just take an asset to the point where it’s a well-oiled machine and it requires very little oversight to keep it as such, I don’t see much incentive to sell it, and there are certainly other people who think like that, too.
Joe Fairless: Do you do refinances along the way?
Kira Golden: We tend to put decent [unintelligible [00:20:38].25] so if we want ten years or more on our debt, but there are supplementals that are available and other ways to access capital.
Joe Fairless: Got it. And what type of structure do you have with investors?
Kira Golden: We keep it super simple. It’s an LLC, everybody’s a joint owner, pro rata to their investment amount.
Joe Fairless: Oh, really? So if you invest a dollar and it’s a ten dollar raise, then you’ll have 10% ownership, you don’t take any fees on top of that?
Kira Golden: Correct.
Joe Fairless: Okay.
Kira Golden: I mean, it depends on the deal. Some of them have [unintelligible [00:21:16].22] some of them don’t, but in general we keep it pretty simple and straightforward.
Joe Fairless: What is your best real estate investing advice ever?
Kira Golden: Don’t freak out. When stuff gets scary and hard, that’s the most important time to keep your cool and get aggressive. I didn’t lose a single property when the market turned down; we were really well positioned, and it’s not all because I did it right… Some of it was just really, really getting creative and gritty when we had to.
I definitely freaked out for like a few seconds, I’ll be honest; there was a moment where I cried. But then you kind of pick yourself back up and you just figure it out and you do it. If you don’t freak out, you keep pushing forward, everything else gets figured out over time.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Kira Golden: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:22:15].12] to [00:23:11].25]
Joe Fairless: Best ever book you’ve read?
Kira Golden: Baby Wise.
Joe Fairless: Baby Wife?
Kira Golden: No, Baby Wise, like smart.
Joe Fairless: Wise. Baby Wise.
Kira Golden: Yup.
Joe Fairless: Best ever deal you’ve done?
Kira Golden: My Lightning Round is not very lightning, sorry…
Joe Fairless: We can edit… [laughs]
Kira Golden: [laughs] Good. The condo project in Chamonix, France.
Joe Fairless: What’s a mistake you’ve made on a deal that you can think of?
Kira Golden: Long list… I would say the mistake I regret the most was trusting the seller to fully disclose everything.
Joe Fairless: Can you give me an example?
Kira Golden: I acquired an apartment complex from at the time a much more experience and savvy seller than I was, and someone I thought I kind of could just trust, that I had a relationship with, so I didn’t do the kind of due diligence that I normally did before, and I certainly didn’t do the exhaustive due diligence I do now. That was a really expensive (like multi-million-dollar expensive) error… But I sure learned a hell of a lot from it.
Joe Fairless: When presented the same situation, how do you approach it differently now?
Kira Golden: No matter who the seller is – it could be my mom – I just don’t really rely on their representations for things when I buy at all. I make sure that I look at everything as a blank slate, from scratch, when I do my due diligence.
Joe Fairless: What’s the best ever way you like to give back?
Kira Golden: Definitely through – it sounds maybe a little cheesy – what we do. I don’t like to compartmentalize my social efforts and my business efforts. I like to like a wholly, fully integrated life, so I see what we do every day as a way of giving back to people and approaching our business with a fair and balanced mindset that doesn’t get greedy, but that offers people something that they wouldn’t otherwise have access to, and does so in an honest and ethical way. I’m a thousand percent committed to that daily.
Joe Fairless: And where can the Best Ever listeners get in touch with you or your company?
Kira Golden: They can call us… 844-SOURCE-4. We also made a special landing page and made an offer specifically for your listeners – people can go to DirectSourceWealth.com/joefairless and get a free IRA download that we put together just for your listeners.
Joe Fairless: Well, Kira, thank you for being on the show, talking about 1) why you’re talking from where you’re talking – Puerto Rico; the tax advantages that you came across through your friends at iPlanGroup, and then also what you’ve got going on from a projects standpoint both in Puerto Rico, the challenges and the advantages for doing projects there, as well as the projects that you and your team are doing in the United States. You talked a little bit about the Phoenix deal and the business model behind that and how you are projecting to increase the NOI by 15%.
Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Kira Golden: Thanks, Joe.