Most people have not heard of tax lien investing. Yet there are millions of people across the country earning safe, secure, and most importantly, high percentage interest returns by investing in tax lien certificates. To put it simply, investing in tax liens is an easy, high profit way to invest in real estate, without needing large sums of money to do it.
So what are tax lien certificates?
Each year property taxes are due on all properties. The local government uses the money from property taxes to pay for various things in the community. If an owner doesn't pay their property taxes, the government still needs that money to be able to run their county effectively! So what's a government to do? They levy a tax lien against that property and auction it off at a tax lien sale. An investor, YOU, will purchase that tax lien with the understanding that you will earn a certain percentage interest rate. When the owner of the property finally pays off their taxes(plus penalty fees), the county then cuts a check to the investor for the principle amount invested, plus any interest or penalty fees accrued. The county makes out because they get the money they need to run things, the home owner or business makes out because they are given more time to pay off their taxes, and the investor makes out because they just earned a lot of money without really doing much at all!
Why should I invest in tax lien certificates?
Safety
Tax liens are sanctioned and run by the government. Your investment is protected by state law and secured by actual real estate! What other kind of investment option provides that kind of backing? Take a look at it from the other end. People do NOT want to lose their homes. So odds are they'll pay off their taxes, thus paying you off. And if they don't...you just may end up with a free property.
Minimal Competition
The great thing about tax lien investing is that, for the most part, it's a completly unknown investing option. Most people think that stocks, bonds, mutual funds, CDs, money markets, and traditional real estate investing are the only ways to invest their money. So what you have is a very small number of people "in the know" making tons of money in an extremely low risk form of investing.
High Return on Investment
Your return on investment will vary largely depending on what state and county you are in. But to give you a rough idea, interest rates will vary from about 5% to 25%. Now, given how safe and easy this is, these kind of interest rates alone would be worth the investment. But there's more. In most cases you won't have to wait a whole year to earn your 15% interest. If the property owner pays off their taxes in one month, you'll still earn that same 15% interest, but you'll get it one months time. Freeing up your money to invest again. Lets say you take that money, and each month invest in a tax lien certificate and get paid off right away. That's 15% interest, 12 times, giving you a final return of 180% over the period of the whole year. Because interest rates are always calculated over the period of one year, this is what's called your effective return on investment. This is why investors love tax lien investing. In a state like Texas your effective return on investment can be up to 300%!
Examining the alternatives
Here are some alternative investing options that the majority of americans invest in. Included with them is an average interest rate and the degree of safety of the investment.
Savings account - 1% - safe
Money market - 1-2% - safe
CDs - 1-4% - safe(interest rate depends on length of CD
Stock market - average growth 11% - unsafe, percentages vary wildly from year to year
Tax lien certificates - 5%-300% - Safe. Government run. Enforced by state law. Fixed interest rates.
The ultimate win/win situation
So what happens if the owner doesn't pay off their taxes? Well in many states you would initiate a foreclosure on the property. The property gets auctioned off at a tax deed sale, and as the tax lien certificate holder, you get paid off first. But in other states the property is signed over to you free and clear! That's right, your small investment geared to earn 15% just earned you a free house with which you can do as you please. Live in it, rent it out, sell it, whatever you want.
Conclusion
So why should you invest in tax lien certificates? Because it simply doesn't make sense not to. If you'd like to learn more about the ins and outs of tax lien certificates or specifically about tax lien auctions, more detailed information is available.
