When a property owner doesn’t pay a tax bill, the county government may establish a legal claim against that person’s property in the form of a tax lien. Tax lien investing involves buying tax lien certificates, which are issued by county governments when their residents fail to pay their property taxes.
Issuing a tax lien certificate and then selling it to an investor allows the governing body to recoup the tax payments and use them while giving the property owner a set amount of time to make the required payment before the foreclosure procedure starts. As an investor, you have the chance to earn substantial returns in the form of interest or the property itself if the delinquent property owner doesn’t pay off what they owe.
If you want to learn how to invest in tax lien certificates, read this article for detailed pros and cons. We also recommend you take some courses or a masterclass in the field if you are serious about this type of portfolio diversification strategy.
Pros of Tax Lien Investments
Low Initial Investment
You don’t need to make a sizable payment to get a tax lien certificate. Tax liens are available for as little as a few hundred dollars or as much as a few hundred thousand dollars. It depends on how much is owed in property taxes. Tax lien investing necessitates extensive due diligence. You can invest in tax liens without having to go to the auctions.
The taxation authorities give the homeowner a set length of time to redeem the tax-lien certificate – meaning to pay off the investor with interest. If the debt is not paid off, the investor is given the green light to foreclose. You can foreclose on the property and resell it to make an even greater profit on your tax lien investment than if you collected the principal and interest from the homeowner.
Return on Investment
The principal and interest that home property owners pay when they settle their past-due tax payments provides the return on investment in the tax lien certificate. Where the property is located can affect the interest rates. Typically, interest rates can be from 18% to 36% per year. In Florida, the highest interest rates on tax liens are 18%, whereas in Alabama, the rate is 12%. Note that there are only 21 states where you can acquire tax lien certificates.
Taxpayers must pay both the outstanding debt and interest to complete their tax obligations, which enables investors to earn their return. The rate of return may exceed what your traditional investments yield, but you need to be aware of the risks.
Cons of Tax Lien Investments
Time Involved
The initial work involved in investing in tax liens is extensive. To begin, you must be knowledgeable about real estate in the region you invest in and thoroughly investigate the property with a tax lien in order to understand what risks you may be incurring.
Property Issues
When you perform due diligence on the property, ensure you check for risk factors such as the following:
● Undesirable property or neighborhood. For your tax lien investment to yield positive results, you should focus on single-family homes in good school districts and pleasant neighborhoods.
● Environmental issues in the area. You will not likely find a home built on a landfill, especially when looking at affluent neighborhoods, but environmental issues might still make an area undesirable.
● Industrial properties. You should stay away from them as they do not represent safe investments.
Before buying or bidding on a tax lien certificate, it’s crucial to research the state of the property. If you foreclose on the property, you take ownership. The expense required to renovate the home could reduce or eliminate your profits. If the property has major damage, that could render the property uninhabitable or unsellable.
Bottom Line
Tax lien investing offers the possibility of getting a substantial return on your investment. Like any investment, there is risk involved. Going into it with some education and a lot of research, tax lien certificates give you another way to build and diversify your investment portfolio. Tax liens certificates do not need a high initial investment; they can be bought for as little as a few hundred dollars. You’ll need to conduct thorough due diligence to understand the risks.
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