Latest / Glovisor Podcast / Ep. 46: How Investors Are Using Opportunity Zones to Build Wealth & Cut Taxes - John Rubino
Transcript
- Joe: Imagine investing in areas poised for explosive growth and keeping more of your profit. Opportunity zones aren't just a tax break, they're a wealth accelerator. Welcome to the Glovisor Podcast, where we explore business growth, communication, and personal development through real conversations with people that make an impact. Our guest today is a veteran in real estate investing and founder with decades of experience in syndication, private equity, and passive real estate investments. He's raised and deployed tens of millions of dollars across tens of projects and delivering consistent returns for hundreds of investors. Globiser welcomes John Rubino. John Rubino - JID Investments: Joe, thanks for having me today. I appreciate it. Good to see ya. Joe: you're welcome. Looking forward to the conversation. John Rubino - JID Investments: Same here. Joe: All right, John. So tell us a little bit more what you do. John Rubino - JID Investments: Sure. well, I guess I could start with a little bit of my journey if you don't mind. You know, originally from New York. I I was I started in with the Navy. I was a Navy pilot for twenty years. I had a blast doing that, met some wonderful people, got a chance to serve my country, kind of follow my dad's footsteps. He was in the Marine Corps. And so that was always an exciting part of my life. Top Gun came out and I was like, I'm gonna be a Navy pilot. And that's what I did for twenty years, which was great. about halfway through my career, I got into real estate because I had some friends in the Navy that were really excited about it. They talked about wanting to invest in real estate, buying property. So back in about 2003, 2004, I decided, yeah, let's check this out. And I did some research. I worked with them. We bought a few properties and we ended up doing some investments together, which was great. And so kind of fast forward to to present day, I had, you know, gotten some great experience as an active investor. And then during my career, I also passively invested with some of my friends because I decided to make the Navy a career. Some of them decided to get out and start their businesses. And so I took some of the money that I made with them and we were able to invest it into some of their projects. And so I was getting about a 10% a year return. I was learning more so about demographics and analyzing deals and understanding real estate. And so it was really exciting to see how my money grew, but also understanding the ins and outs and the semantics of how to look at deals and how to do the due diligence and know what are good locations. So when I got back to Washington, DC after a few tours, including three years overseas in Italy, which was amazing. I decided I wanted to start a business centered around real estate investments. And so the first thing I did was I made sure I had a great financial kind of counterpart to what I do. And so I brought on my accountant, who's been my best friend since 2010. And together we stood this business up, which was really designed with two kind of you know theses or ways of focusing the business. One was, hey, let's bring on investors that can partner with us, bring in capital, and together partnering with our firm. invest with folks that are building, designing, developing, operating projects that you see behind me here. And so we were able to raise capital that started first with friends and family. we were raising, you know, anywhere from 250,000, let's say, to $500,000. And then we got into the larger checks, you know, we're getting into the million, the two million, the three million, and we started bringing on, public accredited investors. So we said, hey, we we've got to, you know, bring an attorney on board and make sure we do this right. So we started to do SEC regulation D 506 filings through a securities attorney so that every project that we brought forward for investment was set up under a business and that each investor investing in each of those specific projects knew where their money was going, the type of project, who was running and managing it, you know, where the location was, and then all the details of that investment. So we set up our investments as single purpose vehicles, meaning that every project has a separate fund or a separate investment offering. And so we'll go out and raise, let's say, $3 million to build a 190-unit apartment complex, say in Richmond, Virginia. We'll go out and raise the $3 million in our community of investors. We call them our family of investors. And together with my money and my business partner's money, David, we then bring that capital into the deal. And we typically come in as a limited partner on a smaller deal, maybe like a twenty, thirty million dollar deal. But on a bigger scope deal, maybe we'll come in as a co-gener and help the general partner with their equity requirements. So I've analyzed deals now. I've learned quite a bit of not only where my money fits, but where the bank comes in or the debt, if there's a private equity group, a family office. And just being able to walk a project from start to finish. And so I've done that for thirteen and a half years to the firm and the business. Like you mentioned, you know, we've raised over forty-five million dollars across, you know, 35 projects, 33, 35 projects. And we continue to grow. And, you know, it's been a bit of a challenge the last couple of years with COVID, but we're still doing well. And I'll I'll knock on one here. We haven't lost any money and we've kind of, you know, instead of maybe hitting a home run or a triple, we've hit singles and doubles, which in this environment has still been very good. And we're looking to continue to scale and grow the company. I've also been doing doing some coaching and doing some education on helping investors learn more about growing their wealth through investing in passive real estate. So it's it's been a great journey, Joe, and it continues to evolve. And I just, you know, trust the the Lord up above to just, you know, show me which direction he wants me to go to next. Joe: Now taking projects from in the hundreds of thousands of dollars into the millions, there's a big learning curve there. What would you say was the biggest John Rubino - JID Investments: Absolutely. Joe: obstacle you had to overcome? John Rubino - JID Investments: Yeah, I would say the smaller projects started out as, you know, general JV joint ventures with borrowers, and you know, they'd bring in twenty percent of the money, we'd bring in eighty percent of the money, pretty straightforward. You know, you get a deed of trust, you have a note, you have personal guarantee documents. So it's pretty clear-cut, pretty easy. Budgets were pretty straightforward on renovation projects, maybe a single family or up to maybe four units. But when you get into, you know, a multifamily commercial real estate deal. you know, the performers and the financials are are quite excessive, quite detailed. And you're looking at everything from how's the money coming in, how is it situated, how is it broken down, how is the bank, you know, what's the terms the bank's offering, what's the terms that the equity that's kind of ahead of you, if it's a larger scale company that's writing a bigger check than we do, like a 10 or 15 or 20 million dollar check, what's kind of their parameters? the breakdown of costs is just pages and pages, you know, because you go through soft costs, architecturals, engineering, attorney costs, right? And then when you get the project developed, if you're doing a development deal and you're then constructing it, or we call it the vertical, you've got all of your vertical costs, all your construction costs, your contingencies, your insurance, your taxes, anything and anything that has to do with the total overall cost of that project. So you're talking pages of information. And then you have to figure out, okay, what are we doing with the project when it's done? Are we selling it individual condo units? Are we doing apartments where we're stabilizing them and getting them occupied at you know 95% occupancy? How are we doing as far as targeting market rents? So there's a lot of moving parts. And so to be able to look at a deal from day one when you're I analyzing it as a good investment, all the way to, you know, year three or year four when you exit. And knowing, okay, so this is the path we're supposed to go down, but if we go like this or like this, but we're still moving towards that common goal, we've got multiple exit strategies so that most importantly, my investors and their capital is protected. Joe: Can you tell us a little bit more about opportunity zones John Rubino - JID Investments: Sure. Joe: and what are the advantages for you as an investor and for the investors that you're working with? John Rubino - JID Investments: the first iteration of the opportunities on program came out during the first Trump administration. it was bipartisan approval and and legislation that went through and basically went into law. It was part of the Tax Cut and Jobs Act in 2018. And so basically what that allowed is it allowed governors and the mayor of DC to basically choose areas that were prime for re-gentrification, areas that were kind of urban but were growing and saw real promise. And so those governors and the mayor of DC picked those kind of parcels and together with the housing and urban development agency basically charted those different parcels of land across the country and allowed for developers, either private or public, to request the potential to utilize that property through a purchase, request for proposals, RFPs to come in and put together different types of housing opportunities for those communities. So you were coming into a regenetrified area, you were looking at building housing which is much needed, especially, you know, you're fast forward to today, affordable housing is such a need, but you go back to our to 2018 and it was, you know, still a huge need. So it provided the community with great opportunities for investment. And it also provided investors with a great opportunity to come in to invest to take advantage of the program. So when the program first started, it kind of had several milestones and several benefits for an investor. The first was that if an investor had a liquidated gain for profit, whether it was a business they liquidated or a stock that they liquidated or some sort of real estate that they liquidated, they could take a portion or the entire portion of their capital gain from that liquidated event and they could put it into an opportunity zone investment. And basically they had five years from 2018 to not have to pay the tax, the long-term capital gain in that year of liquidation. So the first iteration of this sunsets on December 31st, 2026. So if you came in in 2018, 19, 2021, you could continue to hold off on paying that capital gain until tax year 26. Okay, so that was the first benefit. You had an extension on the capital gain payout. You also had some basis reductions or changes in the basis on your gain, where if you stayed into an opportunity zone after the first five years, you got a reduction of 10% on your basis. So if you brought in $100,000 and that five-year window, you wouldn't have to pay a tax on that, only up to 90% of that of that gain. So instead of paying the capital gain on a hundred thousand, now you're only paying the gain on ninety thousand, which was fantastic. And then if in 2018 and 19 and 20, if you invested in those three years, you also got a five percent reduction in basis if you stayed in for a total of seven years. So you got the reduction in basis the first five years for 10%, and then another reduction in basis of five percent if you stayed in for seven years. So now you have to pay a tax on eighty five thousand instead of ninety a hundred thousand, which was great. and then the second benefit was you got bonus you get bonus depreciation. And bonus depreciation obviously is you get all the depreciation write-offs for each year that you're able to to claim depreciation. And you don't have to worry about recapture on the back end when you liquidate and you kind of come out of that investment. So that was the second benefit. Actually, it was the third. The first was the gain getting extended out, the second was the reduction in basis on the tax payment, and the third was the depreciation, a bonus depreciation. The fourth benefit was if you stayed in the program, which Has a minimum timeline of 10 years. You have to stay in the investment for 10 years. After 10 years or more, the gain that you've earned on that profit when you liquidate that appreciated gain would not have a federal tax. You wouldn't have to pay any federal taxes on that gain. And then if you live in 45 out of 50 states, and the 50s in the five states you wouldn't you would have to pay state taxes on. New York, California, North Carolina, Massachusetts, and Arkansas and Arkansas. I can get those to be sure. But those five states, if you lived in any other state other than those five states, you would also get tax free at the state level. So let's say you're in the project, it's a hundred thousand dollar investment. Let's say it's gonna be a two X, you're gonna make a hundred percent return. Let's say you're going to get some cash flow of that 100% return throughout the project, maybe like in year three or year four. So you got the depreciation that you're taking off the cash flow and you're getting the the bonus depreciation write-off. So in essence, that cash flow is tax free, right? And then when you liquidate, let's say the other 85% of your remaining profit or $85,000 comes out as a long-term capital gain at that 10 years or beyond point. That $85,000 of appreciated gain is tax-free at the federal level. And again, 45 to 50 states. So that's the fourth real benefit of this program. So as you can imagine, in 2018, everybody jumped into this, everybody wanted to be a part of it. The challenges they had was the regulatory process. So a lot of the things that were challenged was the accounting, the ability to capture a lot of these financials because here's a new program. And then obviously everybody wants in. So they had some challenges with it. So in the tax, the the big beautiful bill that's going to take place on January 1st, 2027, it's going to continue the opportunities on program and bring it into a new timeline, a new track. Okay. So in December 31st of 2026, the old program under the 2018 Tax Cuts and Jobs Act will expire. And then if you start to invest into opportunity zones on January 1st of 27 or beyond, because now that program will be permanent, you will take advantage of the opportunity zone program going on. So we'll call it opportunity zone two point And in two point you get first five years where you don't have to pay the gain. So if you come in in twenty seven, you don't have to pay the gain until thirty-two. If you come in in twenty eight, you don't have to pay the gain until thirty-three. And so you get that five-year buffer for the tax. You get a 10% reduction if you're in a urban, suburban area on your tax. So it comes down to 90% of the tax when you pay it in year five in the new program. If it's a rural opportunity zone, it's a 30% reduction in basis. So now you're only paying taxes on 70% of that gain. Okay. You get the bonus depreciation. And then you get that tax benefit on the game when it liquidates after the 10 years, 10 years or beyond. So if I come in in 27, I get all those benefits, and then I have to I can come out as early as 2037 and not have to pay at federal level tax or state level on the 45 of the 50 states. So that was a lot. I know I threw a lot in there. So definitely love to hear Joe: Mm-hmm. John Rubino - JID Investments: some of your thoughts and some questions, because I'm sure folks are gonna be like, what the heck did this guy just say? Joe: All right. So let's start off. does this apply only to new builds or rehab projects? John Rubino - JID Investments: You know, it has to meet the criteria of the Opportunity Zone Program, which there is legislative guidance. There's guidance from HUD, there's you know, all kinds of guidance that you can look at because you do have to maintain a certain characteristic of these properties, a certain level of it has to either be a business or it has to be managed by a business. So there are parameters there that are inside the law that Different investments that are coming in to invest in an opportunity zone track have to meet in order for it to qualify to be what's called a qualified opportunity zone business or a QOZB Okay. And then the investment itself either gets invested directly into the QuasB or it could come into what's called a qualified opportunity zone fund or quof. And so a business like me. I raise money, right? And so we have two opportunity zone investments that are inside of opportunity zone businesses. They're operated, managed, and controlled by our sponsor partner. And then we bring in the capital through a qualified opportunity zone fund to invest into those projects through the qualified opportunity zone business that's owned by the sponsor. Okay. So the sponsor meets the parameters of the requirement of that. business, the qualified opportunity zone business. And then the sponsor can go out and raise money directly into the business, or they can go out to a broker dealer, a syndication company, or a capital raiser to bring money through a qualified opportunity zone fund. That's the business side. for an investor, you know, you basically are looking for these types of deals. most of them, I meant to say all of them, but a good chunk of them are development deals because again, you're looking at a 10-year minimum, right? So it's ideal to find these tracks as land that's developed, land that you can bring in and basically get zoned and entitled to build. And then you have the opportunity to do construction. So that usually takes about three to five years, right? So you're still gonna get returns that are either accruing or they're gonna be deferred. But once the property starts paying out cash flow, you're going to start getting distributions on a development deal, probably around year three or four, year five. And then the cash flow is gonna take you out to year 10. And then with the liquidation of that opportunity zone business, or when you're maybe taken out with a refinance, you're gonna get caught up on all those years that you didn't get a distribution, plus you're gonna get your appreciated profit on your exit. Joe: it seems that it's a lot easier to work with someone like yourself who's out there hunting for these deals and not have to develop the property to have to go through every single aspect. Is that where you're John Rubino - JID Investments: Yeah. Joe: seeing more people doing that kind of investment versus hunting for their own properties? John Rubino - JID Investments: Yeah, my my response will always be it depends. a good friend of mine taught me that. if you if you have a a bigger business, let's say you have a a registered investment advisor you work with, or you work with a broker dealer that looks for these types of deals for you as an investor, they could help with the management, they could help with the identification of the right characteristics of the property you're looking for. But if you're working with a larger company, they should also have a director of investor relations or an investment relations team that basically controls the money coming into those investments, right? So they would be the ones that would be similar to me, but they would work directly with a sponsor. So they would be working with individual investors or larger scale investors and basically be working with them to invest directly into the qualified opportunity zone business through that sponsor. If it's a smaller project, a developer maybe that's really focused more on building the property and meeting the criteria, they may come to a business like us, or they may go out to a registered investment advisor and say, hey, look, you set up a qualified opportunity zone fund, bring the fund to the deal, and then those investors can pull their capital together with yours and invest in our qualified opportunity zone business through a qualified opportunity zone fund. So it just depends on the size of the company, their staff, Who's part of the investment relations team? If it's a bigger company, then yeah, I would feel comfortable as an investor going directly to that sponsor. If it's not, it's a smaller company, or if it's a company like me that's actually out hunting for these deals, I'll bring those types of deals to my investor base so they have the opportunity to invest alongside with us inside of our qualified opportunity zone fund. Joe: So is there an investment strategy where opportunity zone investing doesn't make sense? John Rubino - JID Investments: Yeah, I mean, you the first thing is if you don't have a liquidated gain, then you know, you can't really invest inside a cap inside of a qualified opportunity zone fund. So if you have a business or you have stocks and and they're crushing it and you don't want to liquidate, then don't, you know, continue to do that. But if you're coming up on a situation where you're gonna have a sizable gain, excuse me, let's say you're selling a business and you're gonna make 15, 20, 30 million dollars. it makes a lot of sense to park a good chunk of that into an opportunity zone investment because you'll be able to invest in that. You'll be able to wait that five year period to pay the tax, and you're gonna get that reduction of basis. So 10% on a $15 million gain, it's a one and a half million dollars of tax you won't have to pay on that $15 million of gain, right? But it it's really a capital gain investment. It's a capital gain liquidation to invest, whether it's a short-term gain or a long-term gain. So if you don't have those types of funds or you're not going to liquidate, it wouldn't make sense to invest inside of a an opportunity zone. Another thing, and I know we won't speak too much on this, but like if you have folks that have own active property and they want to do a 1031, with a 1031, it's money that went into the property, money that comes out of the property 100%, right? But if they sell a property they own and it's an investment property and they want to come into an opportunity zone. They can keep the initial investment or invest that in, or and they can invest all of the gain or a portion of that in. So again, I recommend talking with your tax professional and and your you know your financial advisor. But the nice thing about opportunity zones, it's passive, right? Whereas with a 1031, you're actively owning a project or a house, you have renters, and if you're older or you want to liquidate some of that portfolio. the gain that you realize from that portfolio could be put into an opportunity zone deal and you can hold off on paying the capital gain tax for the liquidation of those properties. Joe: If one of our listeners wanted to work with you, what would that journey John Rubino - JID Investments: Mm-hmm. Joe: look like? John Rubino - JID Investments: Yeah, that's a great question. obviously opportunity zones are part of our portfolio. we we also invest in you know, multifamily projects. We're in Washington, DC, Maryland, and Virginia. We have projects down in the southeast, in Georgia, South Carolina, North Carolina. So we're all over the southeast in the mid-Atlantic. for me, I love talking with people who have interest in learning more. want to talk to us and meet with us and really have us walk through our business plan, our strategy, and our thesis to really understand how we operate. And then really, you know, put us on the hot seat to ask any questions they have. We're very transparent. We love to share previous projects that we've been in, current projects. And then obviously we have a questionnaire, we have our accredited investor perspective folks that want to join us. They would fill that out. And then once they join us as a new investor, they're in a position to see everything that we've done, we're doing, and getting ready to do. There's no fees to become an investor with us. You just are in a position to be part of our family. And you also have the opportunity to see everything we do. we have we utilize the Juniper Square investment portal, which is fantastic. And all of our investors, their distributions, our communications, our taxes, we do all the taxes for you too, by the way. So any deal that you come in and invest on with us, we're going to take care of all your tax documents. And we we upload those onto your Juniper Square portal page. You can pull up each investment you're in. any new deal we have, we put in a data room on Juniper Square. So we walk through, we we have a very thorough and detailed onboarding process for our new investors. And we never want our investors who are coming in that are new investors feel pressured that they have to invest right away. They don't. We would rather bring someone in when we don't have a deal so they don't feel that pressure. And then the best question I get after I bring them on and they feel comfortable with us is when's your next deal? So obviously that's very important. folks have come in and have toured projects with us. We love to do that. We have some active deals right where I live here and outside of Fairfax County, Virginia. And so we want to make sure those that are joining us feel really good about us before they even think about their first investment. Joe: Can you share a client's success story? John Rubino - JID Investments: Sure, absolutely. we had some deals before COVID that really were grand slams. we we came in with very conservative numbers. We had a three a three-year project in Washington, DC for a new construction project. We expected to bring in about $750,000. And after three years, we expected about a half a million dollars of profit. After three years, we made $675,000 in profit. So obviously, our investors were very happy. They made a much better return. some of our direct investors who have utilized self-directed IRAs have seen success using that as a platform to invest with us. we have eight to nine doctors that have stood up LLC and LLC to invest with us. And so a success story for me is when you invest with us after one or two projects, you're not digging into your pocket anymore, bringing any more money. You're basically making money off that original investment. And now we're using those gains and that growth that you've had in our portfolio to invest on future projects. so that to me is a success story in itself. One specific project that we had that went well even through COVID was we developed and built a 110-unit condo building in Washington, DC, right on the water, across from the Marine One Hangar for the president and the Washington Nationals baseball stadium. And that was a tough project because it was during COVID. So we'd learned quite a bit. But at the end of the day, our investors still did very well, made a great return, and had the opportunity to invest on a waterfront property in Washington DC, which is is pretty is pretty rare these days, which is pretty cool. Joe: if listeners remember only one thing from today's conversation, what would that message be? John Rubino - JID Investments: have have a good plan, right? Understand what you want to do. And if you're investing in real estate, do you want to be active or passive? If you want to be active, obviously you have more time, know the risks, you understand what the business plan is. But if you're wanna get involved in passive investing, whether you're a business owner and you just want to have a portfolio of capital put aside to invest passively, you want to learn more about the road. path or the way to get to being financially independent, understanding the big picture and holistic to be involved investing in passive real estate. Yeah, I'd love the opportunity to talk with you. I'm a relations-based person, come from a big time family of of multiple business owners. And I think the best thing that I ever heard about my family was that the customers treated them like family. And that meant a lot because that meant that they were doing the right thing. So I'm very relationships based. I'm very transparent. I'm very candid and I will be totally honest with you. And if you have questions about a specific investment or you want to walk through a scenario, or if I can help you with what you're looking at, I'm happy to do that. I'm not an advisor. I don't pretend to be one, but I can help you walk through some of those investments and kind of at least point you into the right direction to talk to the right professionals. Joe: where can our audience connect with you, learn more about your work, and continue this conversation? John Rubino - JID Investments: Yeah, Joe, I appreciate it. you know, feel free obviously to share my communications or my contact information rather with your your listeners. I'm on my website at jidinvestments.com. It's just one word. You can look that up on Google and find us. I'm also on LinkedIn, John Barbino. You can find me on LinkedIn, Facebook, Instagram. but most importantly, if there's a listener out there that really wants to connect with me directly. Shoot me an email. It's my first initial J my last name Rubino, and that's at J I D Investments, all one word dot com. And Joe, I'm fine with you sharing that. And so if so folks want to reach out to me directly, I I'd love to hear from Joe: Right. Well John, thank you so much for joining us. We appreciate your time and the value you've shared. John Rubino - JID Investments: You're welcome. Thank you, Joe. Yeah, I appreciate it. Hope to come visit you again sometime soon and thanks again for the time. Joe: Definitely. Thanks everyone for listening. If this episode inspired you, share it with someone who needs it. And don't forget to follow the Glovisor podcast for more conversations that make an impact. Till the next time.