If you invest in real estate, stocks, bonds, cryptocurrencies and precious metals, you may be looking for new opportunities. While it’s been around for a while, investing in property tax liens is an option you may want to pursue. However, before jumping in and investing your hard-earned money in this option, it’s crucial to understand how a tax lien works and the risks and rewards of adding this investment vehicle to your portfolio.
Understanding Tax Liens
When the owner of a house, office building or land fails to pay required taxes to the government, they place a lien on the property, and a tax lien certificate is then created. It includes the amount of tax due and any other interest or penalties. Fortunately, the property owner has time to pay the outstanding taxes before they lose their property. A tax lien essentially serves as a red flag, reminding the property owner to pay what they owe to the government. After a tax lien is issued, the property can’t be sold or refinanced until all of the outstanding taxes are paid. If the property owner fails to pay the tax bill and other expenses, the government can foreclose on the property. Knowing this is possible gives most property owners the incentive to pay what they owe.
Investing in Property Tax Liens
After a property owner receives a tax lien, it creates an opportunity for investors. You’re allowed to purchase the debt related to that property. To do so, you’ll need to participate in an auction held by the local county government where the property is located. Each year, several counties across the United States hold these auctions, selling tax lien certificates to private investors.
The incentive in choosing this investment vehicle is the interest payout. When you win an auction, the property owner must repay you the entire amount of the property tax lien and interest. While it varies from state to state, the interest rate you can receive may be between 10 percent to 12 percent or higher. If you pay a premium for the lien, it may be added to the amount, increasing your profit. As you can see, investing in property tax liens can be lucrative and diversify your portfolio.
Bidding On a Property Tax Lien Certificate
An auction for a property tax lien certificate is conducted in one of two ways. You can either pay for the interest rate or the certificate. If the interest rate is being used, the lowest bidder will win. The highest bidder will win if cash offers are used for the certificate. Doing your research before bidding at an auction is essential. First, you must decide the type of property lien you’d like to buy and conduct due diligence on your prospects. This action helps ensure you can collect the money owing from the owner. Purchasing a dilapidated property in a lousy neighborhood may not be a wise choice, even though the interest rate is high.
Advantages of Investing in Property Tax Liens
Evaluating the pros and cons of investing in property tax liens is essential. One advantage of using this investment vehicle is its low capital requirement. You can participate in this asset class with as little as a few hundred dollars. Another advantage is the rate of return you can receive. Unlike making a flip investment, which can be highly volatile, you understand the interest rate and return you’ll receive without guessing and getting it completely wrong.
Disadvantages of Property Tax Liens
If you pursue this investment, it’s vital to understand the disadvantages of doing so. The first significant con is the possibility of subsequent liens. Even though investing in property tax liens requires you to pay a small amount of capital upfront, more capital may be required in the future if older liens are discovered. Another con is getting stuck with a neglected property. It’s critical to be cautious of areas with environmental damage or distressed properties. Staying away from these types of property tax liens can save you a lot of worry and frustration. Not to mention, you’ll keep your money. Also there is the risk of not getting paid. If this occurs, you’re out your money.
Using an Institutional Investor To Invest
When you don’t want to take the risk independently of investing in this asset class, it’s good to know you can invest passively through an institutional investor who is affiliated with the National Tax Lien Association (NTLA). For institutional investors to become a member of the NTLA, they’re required to pay member dues and pass a background screening process that ensures compliance with the NTLA Code of Ethics. An institutional investor will purchase a number of tax lien certificates. This action will help reduce risk.
Diversification and ROI
If you decide to add this investment vehicle to your portfolio, diversification can help. Identifying and pursuing a few different options can aid you in creating a diverse portfolio. This action allows you to spread out risk and simultaneously guarantee various sources of cash flow. Keeping the ROI in mind is also helpful. You should identify your financial goals before investing in property tax lien certificates. While they can be highly lucrative, depending on where you buy them, always research your location before you get started.
Summing It Up
Investing in property tax liens takes only a little capital for you to begin. You don’t need an LLC or a real estate license. After purchasing a tax lien, your payment goes towards the taxes that were due by the property owner. In exchange, you receive a property tax lien certificate, equal to the sum you paid for it, plus interest. When you agree to pay for the taxes owed, the county is paid quicker, and you secure a fixed interest rate as long as the property owner pays you. If you don’t get paid, which hopefully doesn’t occur, you’ll need to begin the foreclosure process within a specific period.
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