Fast Profits in Hard Times
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Strategy One: Invest in Tax Liens

 

SNAPSHOT: Tax Lien Investing

How It Works:
When owners fail to pay property taxes, municipalities charge interest (and in some cases, a penalty). As an investor, you can pay those back taxes and then collect the interest when the property owners (or their foreclosing bank) eventually pay the municipality. If the owner fails to pay the taxes within their allotted time, you can foreclose yourself and wind up owning the property.

THE UPSIDE:

  • High Interest: Interest rates vary but are substantially higher than CDs, bonds, or most other interest-bearing investments.
  • You Can Hit the Jackpot: Though the vast majority of liens are paid off in time, there’s always the chance that you could score big and wind up owning a property for a tiny fraction of its worth.
  • It’s Countercyclical: In hard times, more property owners cannot pay their taxes, and so there are more liens to invest in.

THE DOWNSIDE:

  • Unpredictable Timing: Tax liens can be paid off anytime (within a statutory redemption period, which is typically one to two years, but could be as long as five years), and you will have no control over when this happens.
  • Study Required: You will need to spend time contacting municipalities where you might invest, studying their procedures, researching properties, and bidding.
  • Legal Procedures May Be Needed: If your tax lien remains unpaid after the redemption period, you will likely need to file for an administrative procedure with the municipality to foreclose on the lien. Once you own the property outright, you may need to have an attorney “quiet the title” so that you can sell it for full fair market value.

Who Should Invest:
Tax liens are a great choice for investors who want to get started with small sums, can devote some time to research, and are willing to trade liquidity for a safe investment with a high interest rate. “It’s a fixed rate of return, and with penalties, a 10 percent rate on paper can give you a much higher yield,” says Larry Loftis, attorney, tax lien and deed investor, and author of Profit by Investing in Real Estate Tax Liens: Earn Safe, Secured, and Fixed Returns Every Time. On the other hand, he says, “It’s important to do your research. The only way to lose is if you don’t know what you’re doing.”

 

SNAPSHOT: Tax Deed Investing

How It Works:
Rather than buy a lien, you buy the property itself, usually at auction after the municipality has foreclosed for delinquent taxes.

THE UPSIDE:

  • Huge Profits: Buying a property through tax deed sales can mean getting it far below its market value.
  • Quick Turnaround: Many buyers at auctions turn around and immediately resell the property on the regular real estate market at a substantially higher price.
  • It’s Countercyclical: In hard times, more people fail to pay their taxes, so there are more foreclosures and more properties to buy.

THE DOWNSIDE:

  • Moderate Risk: Chances are, you won’t be able to inspect a property thoroughly before bidding.
  • Cash Needed: Most municipalities demand full payment at or near time of purchase.
  • Study Required: You will need to spend time carefully researching and inspecting properties before you bid.

Who Should Invest:
You can make huge profits in tax deed investing, but it’s not for everyone. You will need access to ready cash—either your own or borrowed—before you can buy. You will need to spend several hours per auction researching the properties for sale, and most of this research must be during business hours, as you will need to contact county tax assessor offices, visit properties in daylight, and bid at the auction itself. These are not the easiest investments in this book, but if you can meet these criteria, returns can be spectacular. “I’ve doubled, tripled, and quadrupled my money by buying at tax deed auctions, and I’ve had students who have done even better,” Loftis says, “but it is very time-consuming and travel costs may eat into your return.”




Strategy Two: Buy Real Estate Below Market Value