What is a tax Lien?
All US County’s levy a property tax on real estate; this is then used to pay for local county services such as street lighting and trash collection.
But what happens if the property owner fails to pay the tax? Well a lien is placed against the property by the County for the amount of unpaid tax plus interest and in some cases penalty charges.
So how can you make money out of this? Well in order to keep good cash flow some County’s sell these liens at auction. This means that the County effectively gets its money for the outstanding tax immediately and the purchaser of the lien collects the payments once they are made plus any interest due.
It’s a win win situation for everyone concerned, the property owner gets more time to pay, the County gets its money straight away and the investor gets a good return on his investment.
What’s the Catch?
Its easy in this day and age to sceptical about any investment opportunity, Bernie Madoff is still fresh in the minds of most people. But that’s the beauty of this type of investment, there’s no middle man and you’re dealing with Local County’s so as long as you do due diligence on the property which the lien is against you can’t really go wrong.
If it’s such a good way to make money, why haven’t I heard about it before? Well like all major investment opportunity’s the major players in this market are the banks, and as we know they don’t like to publicise how and where they make their money. There are a large number of wealthy private individuals that invest in tax liens though. Why are they wealthy? Because they keep their noses down and quietly go about their business always looking for the next opportunity.
The only risk Involved is that the tax will never be paid off and the property itself is completely worthless. So as with any investment it’s a good idea to do due diligence on any potential property.
How Much Can I Make?
This will of course depend on how much money you have to invest. A typical tax lien is in the range of $2000 – $4000 you should be able to make at least a 10 – 25% return over 2 to 3 years.
Different County’s pay differing interest rates and the lien could be over 2 to 3 years. So you need to take this into account when buying a lien.
Because of the relatively small size of tax liens you’ll need to build up a portfolio of them, as this enables you to not only spread the risk but increase your return on investment.
Where can I buy them?
Most County’s now offer tax lien auctions. You need to visit your local County website and find out when and where the next auction is taking place, you’ll usually need to attend the auction in person but some States like Arizona are offering online auctions which makes life a whole lot easier.
Before you rush off down to your local auction to make a purchase, always remember that this is a long term investment, so you should only invest long term capital and not your rent money.