What Are Tax Liens and How To Make Money From Tax Lien Investing

Updated: Jun 14

In order to stay ahead of inflation, investors are constantly looking for safe investments.

Especially with the low interest rates we’ve experienced in 2021. But what if you heard from a reliable source that a particular investment could all but guarantee an 18% return? Would that get your attention?

You might be thinking, “There’s no way you can guarantee a high return rate like that without an equally high risk.” Normally that’s true. But this is an exception. And the data proves it.

We’re talking about tax lien investing.

You could say that tax lien investing is under the radar. That’s because it’s still underused by investors in general and it’s been around for over 200 years!

It’s likely that a reason why it’s underused is that the word tax is a bit off-putting. Sure, you can’t escape paying taxes. But one of the great things about tax lien investing is that it takes advantage of that fact.

It simply acknowledges that there will always be people who can’t afford their property taxes. And when it comes to taxes, the government will always get what it says it deserves.

Investing in this fact through tax lien certificates offers an interest rate that is basically guaranteed. There are some people out there who have caught on to this fact.

For decades, institutional investors and family offices have been investing in tax liens with billions of dollars. Billions. But is tax lien investing right for you?

Learn the basics of tax lien investing

Anyone can learn tax lien investing

Whether you own a home or not, property tax is something you’re at least mildly familiar with.

If you own property, the government taxes it.

Pretty simple, right?

Property tax is separate from sales tax and income tax. If you own a home, you have a mortgage. When you pay your mortgage every month, it’s likely some of that money goes toward your property tax.

This is done by the lender who holds your money in escrow. That’s how most people have it set up. Whether or not you know the amount of property tax you pay each month, you’re paying it.

There isn’t a county in the US that doesn’t collect property tax.

Not every property is assessed the same tax dollar amount.

The amount differs property to property. Amounts are based on a few things, mostly features and location.

Before you officially buy a property, a representative will complete a tax assessment. This determines how much you pay.

Some states have different rates, but all rates are calculated as a percentage of the property’s value.

Property tax is low in the state of Hawaii, for example (lower than 0.3%. However, in New Jersey, it’s higher than 2%. It simply depends on where you live.

The average property tax is 1.5%. The Census Bureau says that the average residential property in America is taxed about $2,100 each year.

Just a bit more on property tax before we get to tax liens

When you pay you’re property tax, you’re paying it directly to the county. They’re the ones who collect it. If a person fails to pay their property tax, the property then has a lien against it.

The tax lien is always in the amount of tax owed.

So a lien is sort of like an IOU, in a way.

The problem is that the county has their projects for that year all budgeted out. When a county has lots of liens, that means there’s large amounts of money they haven’t received.

Money they were expecting to have to pay for things they’ve budgeted for.

So, as you can see, local governments don’t like liens all that much.

It means less money for them in the moment and may require lots of time to try and sell them.

What are tax Lien Certificate

What do counties do with all these liens? In an effort to collect as much of these unpaid property taxes as possible, they hold an auction.

The auction is an attempt to sell as many of these liens as they can to the public. Any citizen can attend such an auction as an investor.

When liens are presented at these auctions, they are referred to as tax lien certificates.

Investing in tax liens is easy

Do you need a real estate license to invest in tax liens? Nope.

Do you need to set up an LLC? Nope.

Do you need lots of money? Nope.

When you buy a tax lien, the homeowner is giving you a certificate in exchange for paying their property taxes.

The certificate is not a deed.

It’s good for the amount you paid plus interest.

And guess what else? Your certificate (which can now be called an investment) is backed by collateral.

The collateral is the state law and the property law. These laws guarantee you, as investor of the tax lien, interest.

You’ve paid the back taxes. Now you will receive an interest rate that is guaranteed.

And we haven’t even mentioned that tax lien investments have no secondary market and they’re negotiable instruments. When you buy a tax lien certificate, you earn interest on that property.

The certificate is a legal and enforceable obligation. It guarantees that if the property forecloses, you are the first debt obligation to be paid.

What I am actually getting with a tax lien certificate?

Remember that you’re not buying a property when you buy a tax lien certificate.

You’re paying the past-due property taxes.

You never have to deal with the owner of the property. When the home owner does finally pay the taxes, you get the late fees and interest rate.

What happens if the home owner ends up not paying the property taxes? The house will foreclose.

If this happens, all the fees, penalties, back taxes, and title become yours.

So essentially, you as the tax lien investor experience one of two different outcomes.

(1) You get a secured high-interest rate because the tax lien certificate is redeemed.

(2) You get the property through foreclosure because the tax lien certificate is not redeemed.

It’s common for the second option to happen for very little money.

And one outcome isn’t necessarily better than the other. It simply depends on what your investing goals are.

You always get a fixed interest rate with a tax lien.

Depending on the county, the rate can differ slightly.

For example, the current (as of the fall of 2019) annual interest rate in Baltimore is almost 20%. However, the annual rate in many Illinois counties is over 35%. It’s not surprising that a lot of attention is given to these high interest rates.

Tax liens are a great investment for people with a $100 per property budget or $100,000 per property.

How much can you invest with tax liens?

There’s no limit. Investing in tax liens has no cap.

You can invest as much or as little as you want.

There are no FDIC-regulated limits.

When you secure a tax lien certificate, the property still belongs to the property owner.

The way it works is the court allows them to pay off the lien. That is, until the judge says it’s time to foreclose. The court will tell you, the holder of the tax lien certificate, that foreclosure must happen by a certain date.

If the property owner doesn’t redeem by then, the foreclosure process must begin.

The average time period for this is two years.

By the way, you forfeit your investment if you don’t begin the foreclosure process by the designated date.

If this happens, you won’t get a refund.

How do you buy for a tax lien certificate?

Buy Tax Liens Online

Tax lien sales are usually held once a year in every county.

Use our state map to find one near you.

They used to always be live events that required you to show up. Not so much anymore. Online auctions are much more common these days.

Some counties hold two different auctions during the year.

One they call a county sale and a second they call a city sale. Anyone who wants to participate as an investor must register at least 2-3 weeks ahead.

If required, this is when you pay your registration fee. Expect a fee of between $50-100.

Once you register, you get an email from the county with your bid identification number. When the date and time of the auction comes, you browse the available choices online and place your bids.

There is always a minimum bid.

The minimum is calculated by adding together the interest, penalties (any applicable costs), and gross tax. As you browse the properties that are available, the minimum bid for each one is listed next to each one.

What is the tax lien auction bidding process?

Learn the tax lien auction process

If you want to get into tax lien investing, you can’t be passive.

The bidding process is often long and requires close attention, not to mention a bit of aggressiveness.Sort of like how you need to be slightly aggressive when driving in traffic.

You need to pay attention to the actions of other bidders and allow that to influence your decisions.

The list of properties that will be available at the auction are published a few weeks before.

Depending on the county, there could be a dozen or hundreds of properties available.

You need to make sure that you have a personal system ready before jumping in with bids.

How are you going to narrow down the choices? Have your criteria already laid out. This will help you get what you want.

Go into the auction with a process-of-elimination mindset.

If a property doesn’t meet your criteria, cross it out.

(Read our free e-book for a more in depth guide to the bidding process)

First and foremost, let your investment budget be your initial guide.

Don’t bid on something you can’t afford. Cross those ones off your list first. Then let your goals help you choose where to place your bids.

Not interested in actually acquiring property but you still want interest income? Then bid on some single-family homes. Homes that have mortgages.

The redemption rate on these is very high. Some counties have a 95% redemption rate on these kinds of properties.

Remember that when it comes to tax liens, only invest money you won’t need in the short term. The reason for this is that there’s a 6 month-to-3 year time frame for this kind of investing.

Remember that there’s a registration fee to join the auction, but you only have to pay it once.

There are no commissions that you have to pay.

Tax Lien bidding tips

1. Make sure that you gather as much information as you can before and after the auction.

2. Drive by properties and look at them.

3. Do research about them online. There’s always a chance that a property you bid on will foreclose. It’s best that you know as much as possible about properties of interest.

As you’re doing research, don’t expect to get a look at the inside of the house.

Property owners are probably not going to allow that. But you can still find out enough about a property to make an educated bidding decision.

4. What’s the area and the neighborhood like?

5.Does the property have potential? These are the kinds of additional things you can find out.

6. Know that depending on the length of the redemption period, a property can have multiple tax liens on it.

Want To Become A Tax Lien Expert?

Our Elite Members have access to over-the-counter lists, 400-500 new monthly tax sale auction dates, and even our entire database of OTC Tax Lien, Deed, and Redemption Deed lists. We have over 150,000 properties in our database!

Become a member and maximize your return with tax lien investing.

To Massive Success,

Shade & Stephen, Creators of Secrets Of Tax Lien Investing and Tax Sale Support

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