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SHOW NOTES FOR EPISODE 465: CREATIVE INVESTING IN OPPORTUNITY ZONES
Opportunity Zones were created in 2017 to help invigorate and revitalize low income communities. Today, not only have Opportunity Zones achieved that goal but many real estate investors have found Zones to be a creative vehicle to grow their businesses and defer taxes. In today’s podcast, real estate investor and founder of Arizona-based AspireFund Ryan Scott shares how you can get creative with Opportunity Zone investing and how it can benefit your real estate business.
What You Will Learn
- What Opportunity Zones are and how they can help you grow are real estate portfolio
- How you can invest in Opportunity Zones both passively and actively
- Why Opportunity Zones are a win-win venture for investors and communities
- How you can buy rental properties for only $1,000
- Why it’s important to understand the tax benefits of real estate investing
- How he combined his love for short-term rentals with Opportunity Zone investing
About Our Guest
Ryan Scott
Ryan Scott grew up in the San Francisco bay area, and has lived in San Francisco, North Carolina, San Diego and Gilbert, AZ. His father was a small cap CEO and he idolized him. Rather than pursuing a career as a doctor, lawyer or astronaut, Ryan grew up wanting to be someone who carried a briefcase and got dressed up for work (even if, at the time, he didn’t know what he would be doing). He studied Psych & Econ as an undergrad at Davidson College in North Carolina before getting his Finance MBA from Duke. His thesis was: Investing in Short-term Rental Assets using Creative Financing.
Ryan got started in real estate investing using little or no money down while working a full-time W2 job. In 2012, while living in San Diego, he got interested in AirBNBs and got very involved in short-term rentals. As the market got saturated with AirBNBs, he eventually moved to Gilbert, Arizona where he became intrigued by the power of Opportunity Zones. He saw huge potential and began to research. Eventually he became an expert on Opportunity Zones and created Aspire Fund in 2018. Aspire Fund focuses on bringing affordable, attractive housing to Arizona regions. He quickly raised the first million and broke ground on Kachina Pines up in Flagstaff, Arizona in early 2019. Ryan now lives in Gilbert, AZ with his wife, step-son, and twin girls.
More About Ryan
- He’s currently employed full-time in IT consulting and has been for the last 10-15 years
- He also actively invests in real estate full-time too
- Having the W2 job has helped him get approved for the financing he needs for his real estate investments
- He read Rich Dad Poor Dad while traveling and it totally changed his viewpoint on wealth creation
- He realized that he would never get wealth working for someone else
- And he saw how real estate had serious advantages, not only over his W2 job but over most other small business opportunities as well
Getting Started in Real Estate
- He didn’t have a lot of cash to start investing so he looked at creative financing
- He used hard money lenders to acquire out-of-state fixer-upper properties where he only had to pay $1,000 per property
- After the property was fixed up (in a couple of months), he re-financed it and paid off the hard money loan
- He bought 4 homes in Memphis, TN that way
- His goal was acquire rental properties and hold them long term for his kids’ college education
- He sold three but still has one
AirBNB in San Diego
- Ryan moved to San Diego and got interested in short term rentals when AirBNB was very new
- He travelled a lot so he rented out his condo on AirBNB when he was traveling
- There wasn’t very much competition so he was making great money at the time
- He wanted to buy another property in San Diego but couldn’t find any good deals
- He finally decided on buying an expensive triplex by the beach
- He managed to get owner financing and he lived in one of the units
- He made more money putting the units on AirBNB than renting the units out as traditional rentals
- Later he moved to Arizona when he got married and sold the San Diego properties
- He now lives in Gilbert, Arizona (near Scottsdale) and has AirBNBs in Scottsdale and Sedona
Learning the Tax Benefits
- Ryan made it a bit of a game trying to learn and master the tax code to its fullest
- He saw that it benefits those who best understand the benefits
- He first understood what the incentives were and went from there
- He saw a headline in LinkedIn that said “Biggest Tax Break of a Generation” and it was about an Opportunity Zone fund and he ended up investing in it
Definition of Opportunity Zones
- An Opportunity Zone is a designation and investment program created by the Tax Cuts and Jobs Act of 2017 allowing for certain investments in lower income areas to have tax advantages. The purpose of this program is to put capital to work that would otherwise be locked up due to the asset holder’s unwillingness to trigger a capital gains tax.
Starting His Own Fund
- He realized that starting his own Opportunity Zone fund was not that difficult
- He had to start up a new business, set up an LLC
- He had to have the Operating Agreement state exactly what he was trying to do in an Opportunity Zone
- There is self-certification
- Potential retroactive audits are required to make sure you were operating as the fund should
- As an investor in the fund, you may get paid as you go, but the way most Opportunity Zones are structured is that you are incentivized not to cash-out and paying money out right away
- You’re incentivized to leave the money in the fund, put it to work and sell it after 10 years
- For example, if your Opportunity Zone project makes cash flow from rentals, they will likely put it back in the business
- If they sell the project, they don’t give that back to investors, they reinvest it with the goal to put it back in long-term investments to keep it over 10 years and capitalize on the main tax break in the program and you can wave/defer the capital gains
His First Project
- His first big Opportunity Zone project was Kachina Pines, near Flagstaff, Arizona
- He had to find a census tract that was designated as an Opportunity Zone
- He sought to develop land that was previously seen as undevelopable because of the large upfront investment required
- Kachina Pines had two core values in mind, community and affordability.
- He wanted to make sure that Kachina Pines seamlessly integrates with the Kachina Village landscape and community. Aspire Fund teamed up with Sabé Homes, an acclaimed leader in affordable, sustainable housing, to bring Kachina Village its first new subdivision in over 15 years.
- Nestled among the pine trees, the new homes balance attractive amenities with efficient features to deliver an affordable place to call home.
- Ranging from cozy tiny houses of 400 sq ft to comfortable 1400 sq ft, 3br/2ba homes with porches, their intention is to provide flexibility to renters, home owners and investors looking to contribute to the Kachina Village community.
- It’s an acre and a half portion of land that they subdivided into 9 lots inside an existing suburb area outside of Flagstaff
- Mixture of single family homes and a tiny home community of 4 homes for vacation rentals was built from ground up
- They ended up selling the single family homes to roll into another project and they kept the tiny home community
A Different Approach
- Many investors in Opportunity Zones focus on revitalization efforts in urban areas
- Ryan purposely sought out Opportunity Zones in more rural areas where there is plenty of space and less competition for funds
- They are now looking at areas north of Flagstaff, closer to the Grand Canyon, in more rural areas
- Since Covid-19, many people are relocating out of urban areas into suburban and even rural areas
- He is even looking at larger areas that might have to be rezoned from ranch/horse properties that he could convert to lower income tiny home or manufactured home communities
- For tiny homes, he works with a company called Unchartered Tiny Homes who makes top-of-the-line custom tiny homes, ranging from $75-100,000 each
- He also follows Tiny Home Listings to see what is available
- There’s also financing available for tiny homes
Biggest Mistake
- Early on, once he saw property increase in value, he assumed it wouldn’t increase much more
- He bought property in San Diego at a good time and, when they increased in value 10-15%, they got nervous about investing any more in the market (like regretting that you didn’t buy more Amazon stock)
- What he didn’t anticipate is that he could have invested even more because the prices kept going up and up
Biggest Success
- Buying the million dollar triplex in San Diego near the beach
- Getting into a bigger property earlier in the market cycle was a good decision
Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years
- A lot of people have done a good job of building up their properties and also using tools like the 1031 Exchange to leverage into other properties while deferring capital gains
- But now they have a lot of equity stuck in those properties
- They may be thinking, “In 10 years, can I unlock some of that gain that I couldn’t in a 1031 Exchange?”
- Or, they may be thinking of gains inherent in their stock or real estate portfolios
- The Opportunity Zone is a way to unlock that equity, because you can sell it and not pay the taxes on the other benefits and, in 10 years, the money will come back to you
Current Business
- He love to learn new things
- When he learned about AirBNB, he thought he would be doing it 24/7
- When he learned about Opportunity Zones, he got more into thoughtful development projects
- Initially, it looked like just a great way to make money
- Now, he sees it as a way to change the landscape of affordable housing in a given area
- He initially. got into real estate to have the option of working a W2 job or just living off his real estate investments
- Having a value-based driver there now, makes that even more promising
Rap-It-Up
- Favorite real estate book: Rich Dad Poor Dad by Robert Kiyosaki
- Favorite business book: What Your CPA Isn’t Telling You by Mark J. Kohler
- Most valuable web site for success (other than your own): OpportunityDB.com
- Favorite app: Redfin
- Favorite quote: “Whether you think can or you think can’t, you’re right!” – Henry Ford
- If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? I would be using a significant amount of the money to take people to lunch. Try to leverage that relationship into where I can go next, mentorship or investment dollars.
How to Reach Ryan
DISCLAIMER: Many of the above strategies take knowledge and have a higher degree of risk. You need to do your research and/or work with someone who is experienced to reduce your risk.
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