Should You Consider Tax Lien Investing?

Written By 
Jun 7, 2023
9:00 am

Real estate can be a lucrative investment, but not everyone wants to deal with the hassles that often come with owning and maintaining rental property. One way to invest in real estate without being a landlord is to purchase property tax liens.

Each year, homeowners in the U.S. fail to pay about $14 billion in property taxes, according to the National Tax Lien Association. So tax lien investing presents a potentially lucrative opportunity.

How Tax Lien Investing Works

When a homeowner falls behind in paying property taxes, the county or municipality may place tax lien against the property. This ensures that the property can’t be refinanced or sold until the taxes are paid.

Instead of waiting for repayment of taxes, governments sometimes decide to sell tax lien certificates to private investors. In essence, governments are foregoing the interest and penalties due from homeowners in exchange for current cash.

As the owner of a tax lien certificate, you will receive the interest payments and late fees paid by the homeowner. If the homeowner doesn’t pay the taxes and penalties due, you have the legal right to foreclose on and take title of the property within a certain period of time (usually two years).

So your income from a tax lien investment will come from one of two sources: Either interest payments and late fees paid by homeowners, or foreclosure on the property — sometimes for as little as pennies on the dollar.

Pros and Cons of Tax Lien Investing

One of the biggest benefits of tax lien investing is that tax liens pay a guaranteed interest rate for a set period of time (generally two years) and are secured by the residential property. The interest rate paid on tax liens varies by state, but it can be as high as 36 percent annually.

Another benefit is that tax lien certificates can sometimes be bought for as little as a few hundred dollars, so there’s a low barrier to entry. Therefore, you can diversify your portfolio and spread out your risk by purchasing a number of different tax lien certificates in different real estate markets.

But there are risks to tax lien investing. For example, if the homeowner pays the interest and penalties early, this will minimize your return on the investment. And if the homeowner declares bankruptcy, the tax lien certificate will be subordinate to the mortgage and federal back taxes that are due, if any.

Another risk is that the value of the residential property could be less than the amount of back taxes owed, in which case the homeowner will have little incentive to pay them. And if you foreclose and take title of the property, the legal fees and cost of repairs that might be necessary in order to sell the property could eat into your return.

Tax Lien Auctions

Tax lien certificates are usually sold via public auctions (either online or in person) conducted annually by county or municipal taxing authorities. Available tax liens are typically published several weeks before the auction, along with minimum bid amounts. Check the websites of counties where you’re interested in purchasing tax liens or call the county recorder’s office for a list of tax lien certificates to be auctioned.

If your bid wins the auction, you’ll pay for your tax lien certificate and then begin the process of collecting interest and late fees from the homeowner. Keep in mind that most tax liens have an expiration date after which time your lienholder rights expire, so you’ll need to move quickly to increase your chances of maximizing your investment return.

Research is Crucial

Tax lien investing can be a profitable way to invest in real estate, but success requires thorough research and due diligence. That’s why it’s smart to working with a certified tax lien professional or a lender who has extensive experience in providing capital to investors.

Firstrust has more than a decade of experience in providing financing for tax lien investing, along with a dedicated team of certified tax lien professionals who can help you leverage potential tax lien investing opportunities. Please contact us to learn more about tax lien investing.

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