Tax liens are a trending type of investment that can be done through buying and selling tax lien certificates. Like every good investment, tax liens have the potential to generate high returns, yet, they also come with risks. This article will discuss what these risks are, along with some of the best ways that you can mitigate them so you can maximize your return on this type of investment.
What is a Tax Lien
According to no other than the IRS, a federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all of your property, including real estate, personal possessions, and financial assets. A federal tax lien exists after:
The IRS puts an amount due on their books (assesses liability);
Sends you a bill that explains how much money they believe you owe them; if then-and only if–you refuse or neglect to fully pay this total balance within time limits set by law will it become public information as well as legally enforceable through seizure and sale of any items belonging to yourself whether tangible or intangible without regard for worthiness.
The city could place a lien as proof they are looking into it, so if you try selling your house without settling up with what’s due from last year – they have all rights legally under the law to prevent this sale by enforcing liens until payments are received in full!
Pros and Cons of Tax Lien investing
There are many upsides to investing in tax liens, but there’s also a downside. Here is an overview of the major pros and cons that you should keep in mind before making your decision.
Pros of tax lien investing
- Low capital requirement: After a slow economy, many are looking for low-risk investments – but now stocks and bonds aren’t as appealing. A tax lien certificate is an option that has less to worry about while making good gains on your money. With only a little money as an investment, you’ll be able to get the ball rolling with this low-risk way of investing in something other than what we’ve seen out there!
- Rate of return: The other great advantage of investing in tax liens is the standard rate of return. Unlike flip investments, which can be volatile and unpredictable, with tax lien investing, you have a solid understanding of what your return will be without having to second-guess the market.
- Lump-sum payment: You can calculate exactly how much you’ll be getting from a tax lien investment, which means it’s easy to see your exact rate of return. One thing that makes this all the more attractive is that because these payments are not in an ongoing residual form, when they happen, there’ll be no confusion about what amount was paid at any given time and for how long.
Cons of Tax lien investing
- Lack of recurring income: The fixed payment aspect of buying tax liens can be a drawback for some investors. If they are looking to create avenues of residual income over time, it may not align with their financial goals.
- Possibility of subsequent liens: Tax liens are a significant investment, but they can have some drawbacks. One major drawback is that, as the process moves forward, you might need more capital because your original purchase gets overruled by somebody else’s new one on their property – it sucks!
- Competition: You would think that buying tax liens to purchase is a reasonably cut-and-dried process, but it’s not. You have other investors and money managers constantly looking for these low-cost investments, which can drive up the price of your desired asset. In order to beat this competition, you will need to know your geographic market well and target cheap properties in the $100-$200 range (bigger firms are only interested in higher yield transactions).
What’s a Tax Deed
Tax deeds are legal documents that give the government body issuing it or another entity such as an investor who buys one at auction, for example, the right to sell your property if you don’t pay taxes on time. If, after a period of months or years, depending on jurisdiction and other circumstances, real estate owners fail to pay their outstanding debt owed by them, then local governments may place liens against these properties, which can be sold off at auctions. The funds generated from this sale are used primarily for paying back what was owed in unpaid taxes plus any fines assessed during enforcement periods under various state laws governing delinquent taxation.
A tax deed grants certain rights over somebody’s property when they have failed to make payments necessary towards its upkeep.
Tax Deeds vs. Tax Liens
Even though tax liens are similar to tax deeds, there is a subtle difference. Tax deeds transfer ownership of the property itself on top of unpaid taxes, while with a lien, it’s just an investor’s legal claim against the property, which can cost anywhere from $200-$5000 and provides simple interest that accrues monthly.
When a property owner defaults on their taxes, the municipality places a lien against it. These liens mean that nobody can do anything with the property until it is paid off. The interest rate for these loans depends on what’s allowed by local law and how much investors are willing to risk.
Here’s How It Works: A government body will place a lien if an individual doesn’t pay their taxes which prevents them from doing anything with the property, including refinancing or selling; interested parties may invest in these tax liens by bidding at the auction where they return is based upon maximum rates of interest permitted
Example of a Tax Deed Sale
Let’s assume a house in a tax deed sale is assessed to be worth $150,000 and has $12,300 in back taxes. The highest bid on the property is $99,500. In this example, the county would take $12,300 from the bid amount to cover the property taxes due, the remainder it would be paid to the original owner, that is, $99,500 – $12,300 = $87,200, the original owner would be left with no tax debt and 87 grands. After all, the government authority is only interested in recovering the taxes owed to it. The bidder gets title of the home and an equity profit of $150,000 – $99,500 = $50,500.
How Tax Lien Investing Works
If you’re thinking of investing in property tax liens, then be prepared for a bidding war. This is because the investor who accepts the lowest interest rate or pays the highest premium gets awarded with that lien.
The thing to keep in mind about this type of investment opportunity is that there are two ways it can go – either your bid will win and lead to a higher return on your money, or else you’ll lose out and get nothing at all!
If you’re looking for a property with some extra cash flow, it’s worth taking note of the hidden costs that come along with tax liens. That means repairs and possible eviction fees, which will be costly to deal with on your own if you become the owner.
There are a lot of different rules and regulations surrounding tax lien purchases. To get started, you need to figure out the type of property that interests you—residential or commercial properties with improvements can be bought at auction. In contrast, undeveloped land is purchased before it goes up for sale. Once you’ve figured this out, contact your city’s treasurer office to find when and how their next auction will occur, so that prospective investors don’t miss an opportunity!
Tax Lien Investing Tips: Insights from Voyager Pacific Capital
Tax liens are a great way to invest and make money, but there’s more you need to know before jumping in headfirst. Ensure that your finances can handle the investment, so you end up with nothing at the end of it all!
Trying out tax lien investing is an excellent idea if done right – just read through these tips for some pointers on what not to do:
- Tax Liens Aren’t Always Properties: It’s often not the case that you’ll end up owning a property when investing in tax liens. Sometimes homeowners meet their deadlines and pay off the lien on their home, so it can only be an investment opportunity with interest income. It is essential to keep this possibility in mind before going into such investments entirely for properties.
- Diversification Is Key: A tax lien purchase can be a challenging investment strategy, but it has unique benefits as well. It would be best if you continually diversified your investments, so you have more than one source of income at the same time to avoid risk and guarantee some success in this tough economy.
- Keep ROI In Mind: One of the best ways to build wealth is through investing in tax lien certificates. But before you buy any, make sure that your financial goals match up with what they can provide for you—especially when it comes to ROI (return on investment). You should research which states have better rates and higher limits than others because this will determine how much money an investor could potentially earn from a given certificate purchase.
In conclusion, always do some homework first before deciding if buying these valuable investments is right for YOU!
If you loved the information above and want to learn how Voyager Pacific can help you with tax lien investing, get in contact with us today! For more investment-related information, be sure to check out our blog.