After some time searching yesterday I finally found a solution that will let me do both upload files via SFTP and give nginx the correct permissions to allow one-click upgrades, install/upgrade from the archive.
In ubuntu the group that nginx operates under is www-data so the trick is to add your user "demo" to the group www-data (since www-data is a group)
add user "demo" to group "www-data" (below replace demo with your username)
Code:
sudo usermod -a -G www-data demo
set permissions for user group www-data
Code:
sudo chgrp -R www-data /var/www/html
Followed by
Code:
sudo chmod -R g+w /var/www/html
Now you can modify files as "demo" via SFTP and your Xenforo installation can modify files without requesting credentials.
You should be able to figure out what your nginx process operates under on your distro and make it work.
Hope it helps those confused and don't fully understand Linux user permissions!
*** Commands/Code was taken from a comment on one o digitalocean community questions and re-worded here for XF resources. Don't quite remember the link for proper credits.