Tax lien investing can be a lucrative, lower risk investment choice to add to your investment portfolio. In today’s blog we’ll discuss tax liens as a form of investment. I’ll discuss the pros and cons of pursuing it. You’ll learn how to get started if you decide it’s right for you.
What is Tax Lien Investing?
Tax lien investing is the act of buying the delinquent tax lien on a property. You earn profits while the property owner pays interest on the certificate. You also profit from the liquidation of the collateral securing the loan. When you purchase a tax lien, you have the right to take the property deed. That is, if the owner does not pay off the entire delinquent tax and whatever fees have accrued within the redemption period.
Are They a Good Investment?
Tax liens can certainly be an excellent investment to add to your portfolio. Just as long as you understand how to search for and purchase tax-delinquent properties. As with any investment, the key is to know as much as you can about the property, the neighborhood, and the town in general. You never want to get stuck with a property that won’t offer the returns you’re going after.
Pros and Cons
No investment is good without its due diligence. To better prepare yourself for purchasing a tax lien, you must evaluate the pros and cons.
Low capital requirement: Tax lien investing offers a much lower capital requirement. This is when compared to other forms of investing. It’s possible to jump into this asset class for just a few hundred dollars.
Rate of return: The other big advantage tax liens offer are a fairly standard rate of return. Flip investments can be volatile. With tax lien investing, you have a solid understanding of what your return will be—without having to second-guess the market.
Lump sum payment: You are paid a fixed sum when the tax lien investment resolves. This means that it’s easy to calculate exactly how much you’ll be receiving and what your rate of return is. Also, because the payment is not in the form of an ongoing residual, you get all of your returns at once.
Lack of recurring income: For some investors, the fixed payment aspect of buying tax liens can be viewed as a drawback. When receiving a fixed payment, it may not align with some investor’s financial goals, especially if they are looking to create several avenues of income over time.
Possibility of subsequent liens: Even though tax lien investment requires very little up-front capital, they can sometimes require more capital as the process moves forward. This is because, as the initial lien holder, you will be required to purchase any subsequent liens. It’s important to remember that new liens always take over old liens.
Competition: Another slight disadvantage is the amount of competition you might face when looking for tax liens to purchase, usually from money managers and other investors. The best remedy for this is to know your market well and target low-cost liens—in the $100-$200 range.
How to Buy Tax Liens
Learn About Tax Liens And Real Estate Auctions:
There are two ways to profit from tax lien investing: through interest payments or taking ownership of the property. The entire process should be handled with care and under the guidance of a real estate attorney. Actually, purchasing a tax lien is typically done at a real estate auction. Take time to really understand the real estate auction process before you attempt to bid on any tax liens.
Decide On A Target Area:
Tax liens are assigned by county, so it will be helpful to narrow down your target area before looking for investments. Check out public records to find the financial status of counties near you and find which areas represent the most promise.
Scout Different Properties:
Auctions prevent buyers from seeing the inside of a property prior to sale. Since you will not have seen the property without the homeowner’s consent, you may not be aware of the property’s condition. That’s why it’s important to do your homework and scout out potential properties before you attend an auction.
Make A List And Bid On A Home:
After you identify a few properties that you are interested in, it’s time to attend a real estate auction. Establish your maximum bid before attending to help prevent yourself from accidentally overpaying. Then, attend the auction and place a bid on the property you want.
Notify The Homeowners:
Follow the laws in your area after obtaining the tax lien. In some cases, this may require notifying the homeowners by sending a certified letter to the property. The letter should inform them that you have purchased the lien and state how much they owe in back taxes on the property. Due to the overall lien process, the letter will likely not surprise the homeowners.
Collect Your Money (Or Property):
Once all parties understand the lien agreement, your only job as an investor is to collect interest as the homeowners make back payments. The time period can vary, but on average, it is 120 days. If the homeowner does not come up with the money, the auction winner becomes the lien holder and, ultimately, the homeowner. Depending on any other liens on the property title, you may need a good amount of capital to pay everything off. Always be prepared for this possibility when tax lien investing.
Tax lien investing can be a good way to gain a 12-18% return on your investment, but it comes with competition and some degree of risk. Before you consider tax liens, find out what the guidelines are in your specific state and attend an auction to get a feel of the process.