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.
- 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.
- 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
- Study Required: You will need to spend time contacting municipalities
where you might invest, studying their procedures, researching properties,
- 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.
- 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
- It’s Countercyclical: In hard times, more people fail to pay their taxes, so
there are more foreclosures and more properties to buy.
- Moderate Risk: Chances are, you won’t be able to inspect a property thoroughly
- Cash Needed: Most municipalities demand full payment at or near time
- 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.”