As a real estate investor, have you ever considered earning interest from property lien taxes? While tax lien investing can be risky for inexperienced buyers, it can provide outstanding returns for shrewd investors.

Tax lien investing may not be for everyone, but it can offer substantial benefits to those who understand the pros, possible cons, and process.

To successfully add tax lien certificates to your investment portfolio, you need to know how they work and the rules and potential pitfalls associated with them. 

What’s a Tax Lien?

Tax liens are legal claims placed on properties when owners fail to pay their taxes. When someone fails to pay property taxes to the government, their county or city can place a lien on their property for the unpaid amount. 

When a property has a lien on it, it can’t be sold or refinanced until someone pays the taxes to remove the lien.

Typically, a municipality will place a lien before more severe penalties occur, such as a tax levy or seizure of the property. Currently, 29 states allow tax lien sales.

What is Tax Lien Investing?

A tax lien certificate is a legal document that reflects the amount an owner owes on a property (plus any penalties and unpaid interest associated with it). Municipalities can sell these certificates to private investors via auction. The highest bidder may purchase the certificate and pay the tax bill plus any interest and fees owed.

The investor can then collect any new interest payments from the original property owner until they repay their outstanding debt. The investor may acquire their property deed if the owner fails to pay off the delinquent tax amount and associated fees within a 120-day timeframe (the redemption period).

The goal is for the property owner to pay their taxes. The investor can then make back their original investment plus any interest that accumulates. If the owner doesn’t make their payments by the expiration date, the investor must foreclose. However, most property owners redeem their property before foreclosure happens.

What are the Benefits of Tax Lien Investing?

It’s important to carefully consider whether tax lien investing is right for you. It can be a gratifying endeavor if you understand the risks and can navigate the regulations. But proper research is essential to avoid missing crucial details. 

Here are some of the top benefits keen investors may experience.

1. High-Yield Investments

Tax lien investors can profit off the tax lien’s interest rate, which can be high in some states. There’s also a chance that you’ll acquire a property for much less than its market value.

2. Low Initial Investment

Compared to many other types of real estate investing, tax lien certificates may require lower initial capital. When purchasing a tax lien certificate, you can expect to pay around 3-7% of the property’s total value (U.S. News).

3. A Passive Initial Investment Option

Some individuals like to take advantage of this type of investing without being overly involved in the bidding process. If you’re one of them, you can partner with a professional or fund manager from the National Tax Lien Association (NTLA). You may have the opportunity to invest without attending the auction, leaving the process to experts in the field.

4. Fixed Sum Payments

Once an investment resolves, you will receive a lump sum. Receiving fixed amounts can make it easier to predict your returns.

What’s the Difference Between a Tax Lien and a Tax Deed Investment?

While both liens and deeds go to auction, the buying process is quite different. For tax deeds, you’re bidding on a property title rather than a rate of return. As a result, the highest bidder will win the tax deed and become the new owner of the property.

Expert Tips for Tax Lien Investors

Consider these tips for researching, purchasing, and managing tax lien certificates successfully.

  • Do your research to avoid unnecessary risks and pitfalls throughout the process. The NTLA offers courses to prepare and educate future investors.
  • To find tax liens for sale, you can call your county tax collector or look up their website to learn the specific bidding process for your area and how to register as a bidder.
  • Consider working with a tax lien professional, especially when just getting started. Many members of the NTLA are active investors and fund managers who can help you navigate complex rules and regulations.
  • Expect to play an active role in the process. Be ready to notify the property owner that you’ve purchased the certificate in an auction. You must also inform them if they haven’t made the required payments at the end of the redemption period.
  • Don’t go into the process expecting to foreclose on a property since it rarely happens.
  • Before bidding in an auction and purchasing a tax lien certificate, ensure you understand how tax liens and auctions work in your local area. Laws vary by county.
  • Know your goals before starting the process. Prices and interest rates vary by state, so your ROI can too.
  • Diversifying your investment portfolio can help minimize the risk.

Real Estate Investing

If you’re an experienced investor who understands the real estate market, tax lien investing could be a smart move. Doing your due diligence can make it worthwhile, making the process easier and earning you a higher return on investment. Speak with a financial advisor or real estate agent to get started.