Advantages & Disadvantages of Tax Lien Investing
What is a Tax Lien?
A tax lien investment is a passive investment that you can make through your state and county officials. In most cases, a property owner fails to pay their taxes to the jurisdiction where they live. If this happens, the authorities will put up an auction for all of the delinquent taxes against this particular property.
The auction will have a minimum price at which the government will be willing to accept for this property’s taxes. The tax lien certificate allows you to buy these properties at this set minimum price, and you can sell them later on for more than what you paid originally. Your goal is to win the bids for as many of these properties as possible.
Your return on investment is the difference between the price at which you bought the property and the final selling price of that property. You typically have five or more years to sell these properties, so it’s not like other investments where you need quick results.
Advantages & Disadvantages of Tax Lien Investing
Advantages:
- Passive Investment – You don’t have to do anything after you’ve paid for a property. As long as you’re in possession of the lien certificate, you can choose when to sell it.
- No Experience Necessary – You don’t have to be a real estate expert or have any experience in the industry to buy tax liens. Because you only need the money, not an extensive background in business, anyone can get started with this type of investment.
- Residual Income – If you win the bid on a certain property, you can make an average of $1,000 to $10,000 in pure profit off the final sale price.
- Low-Risk Investment – There’s little risk involved with tax lien investing because it’s not like other types of real estate where you’re actually buying physical property and need to worry about blockages, repairs, and maintenance.
- Passive Investment – You can set up your tax lien business with a professional and still gain the benefits of a passive investment (i.e., you don’t do anything), which many people find more appealing than having to go out and find new properties to invest in all the time.
Disadvantages:
- Time-Consuming – You have to be on top of the bidding process for all your properties because you only get 5 years to sell them. If you do not win any bids at all, then you will not make any money since the taxes are not paid and the tax lien certificate is not turned in.
- Not Beginner-Friendly – While you don’t need to be a real estate guru with years of experience, you should have some knowledge about how tax lien certificates work when starting out. You will also need enough money to make the initial purchase.
- Learning Curve – Like any passive investment, tax lien investing has a learning curve. You need to know how to win bids and collect your money. You can learn all this through books or classes, but you have to put forth the effort in order to get started making money with tax liens.
Conclusion
Tax lien investing is not right for every type of investor. However, if you have the money to invest, are interested in real estate investments but don’t want to get into physical property, then this investment may be for you.
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