Active vs. Idle Tax Lien Investing: What You Need to Know

Investing in the American real estate market can be a lucrative proposition for those willing to take the time to learn about opportunities such as tax lien investing, which is sometimes referred to as tax deed investing. You hear about house flippers, real estate investment trusts (REITs), mortgage bonds, purchasing short-sale homes, and other investment strategies that have become popular over the last couple of decades.  However, many of these investment strategies require significant upfront capital, which can limit your ability to get started in real estate investing.

That’s where tax lien investing comes in. Tax liens are placed on properties by state and local governments when the owners fail to pay their property taxes. The government then has the right to collect the unpaid taxes, plus interest and penalties, from the property owner.

If the property owner doesn’t pay the taxes within a certain time frame (usually one to two years), the government can then auction off the tax lien to investors. The investor pays the back taxes and becomes responsible for collecting them from the property owner. If the property owner doesn’t pay the investor, the investor has the right to foreclose on the property.

Considerations

Tax lien investing offers a number of advantages for investors, including:

1. Relatively low investment amount – You can get started in tax lien investing with as little as a few hundred dollars.
2. High interest rates – Tax liens typically carry interest rates of 8% to 36%, depending on the state.
3. Security of investment – Unlike other types of investments, tax liens are backed by the government.
4. Predictable income stream – With tax liens, you know exactly how much money you’ll make (the interest rate) and when you’ll get paid (when the property owner pays their taxes).
5. Potentially high returns – If you foreclose on the property, you may be able to sell it for a profit, especially if the market has gone up since you purchased the tax lien.

There are a few things to keep in mind before investing in tax liens, however. First, research the laws in your state to make sure you understand the process. Second, remember that tax lien investing is a long-term investment – you may not see a return for several years. Finally, be prepared to do your due diligence on each property before investing, as some properties may have liens against them that you’ll be responsible for if you purchase the tax lien.

Despite these potential caveats, tax lien investing can be a great way to get started in the real estate market with a relatively low investment amount. If you’re patient and do your homework, you may be able to earn a high return on your investment.

Have you ever considered investing in tax liens? What other types of real estate investments have you considered?

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