How to Invest in Tax Liens | How to make money with tax liens | how to make money investing in tax liens | tax lien investing 101 | how do I get started with tax lien investing

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If you’ve ever thought about real estate investing but the thought of being a landlord makes your insides curl, consider an alternative.

Like tax lien investing, which doesn’t actually involve you buying any property at all (but you could still end up owning it…confusing, I know. I’ll explain in further detail a little further down the page).

So what is tax lien investing exactly?

Let’s start by defining what a tax lien.

What is a Tax Lien?

How to Invest in Tax Liens | How to make money with tax liens | how to make money investing in tax liens | tax lien investing 101 | how do I get started with tax lien investing
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A tax lien is a legal claim against an asset that occurs when the property owner doesn’t pay the tax debts associated with the property in question to the government.

Tax liens equal the total amount of outstanding taxes, plus interest or additional fees accumulated by the property owner.

Properties with tax liens can be sold or refinanced until the outstanding taxes have been paid.

So what is tax lien investing?

What is Tax Lien Investing?

Tax lien investing is a method of investing in real estate that involves investing in liens put on properties by the municipality for unpaid tax liens.

When someone doesn’t pay their property taxes, investors buy the liens in an auction. They pay the amount of taxes owed in return for the right to collect that money back plus any interest payments from the property owner.

Interest rates typically vary, depending on the state or jurisdiction, but it can go as high as 36 percent, according to the Tax Lien Association.

If the property owner doesn’t pay the property taxes by the end of the redemption period, the lien holder can start foreclosure proceedings and take ownership of the property.

How Much Money Can I Make with Tax Lien Investing?

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Just like with any investment, the amount of money you can make with tax lien investing is going to vary. Your results might not be the same as your friend in L.A. who’s doing the same thing.

But if you learn all you can about tax lien investing, you can certainly make a decent income investing in real estate with tax liens.

A friend of mine makes about $1,500 to $2,000 a month with tax lien investing, but don’t expect the same results. I’m not saying it’s not possible for you to make that amount – just not making any promises (or giving investing advice). Consult with a certified financial advisor for investing advice.

Pros and Cons of Tax Lien Investing

Pros

Investing in tax liens has its fair share of pros, which include the fact that it can cost very little to get into. I read about someone purchasing a tax lien for $1! But just know that’s not typical. Tax liens can go up as high as $100,000 for commercial properties.

  • You don’t have to go chasing down the property owner – the municipality will do the heavy lifting (debt collection) for you.
  • Start investing with little to no money.
  • Tax liens are typically paid even before the mortgage.
  • Lump sum payments mean you’re paid a sum when the tax lien investment resolves, which means it’s easy to calculate exactly how much you’ll get and what your rate of return is going to be.

Cons

  • You have to make sure what you think buying is what you’re actually buying (do your due diligence).
  • The tax lien you purchase could be a neglected property.
  • You have to know the rules for the municipality in which you’re investing (which might be a bit of a learning curve).
  • Can take up to 120 days to see a return on investment.
  • Possibility of subsequent liens (meaning they’ll require more capital as the process moves forward).
  • The amount of competition you’ll face when trying to bid on tax liens could be pretty high.

Tips for Buying Tax Liens

Convinced tax lien investing is the way to go with real estate investing?

You can get started with tax lien investing by following the steps below.

1. Choose a Neighborhood to Focus On.

How to Invest in Tax Liens | How to make money with tax liens | how to make money investing in tax liens | tax lien investing 101 | how do I get started with tax lien investing
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Before you start investing in tax liens, figure out what neighborhood or area you want to invest in. Is it your local neighborhood? A nearby area?

Think about areas with few abandoned buildings and run-down looking properties.

Do some research or connect with a real estate agent who knows about the neighborhoods you’re considering investing in. They’ll have insider knowledge that might be able to help you make your decision about a certain neighborhood or property.

2. Learn All You Can About Real Estate and Tax Lien Investing.

Learning all you can about real estate investing and tax lien investing is only going to help you in the long run.

I’m taking a course right now to become a real estate agent, but the information I learn in the course will help me become more knowledgeable about the different aspects of real estate.

So follow my lead and take a course if you need to.

3. Scout Out Potential Properties

Auctions typically don’t allow you to see the inside of a property before you bid on it, so you’ll have to do your due diligence when it comes to scouting out potential properties you’re interested in that might come up for auction.

4. Make a List and Bid on a Home

While you’re out scouting out potential properties, make a list of the properties you’re most interested in and determine how much funds you have to bid on the property.

When auction time rolls around, bid on the properties on your list.

5. Notify the Homeowners

After you obtain the tax lien, it’s your responsibility to notify the homeowners.

In some areas, notifying the homeowner means sending a certified letter to the property stating that you’ve purchased the lien and how much they owe in back taxes on the property.

6. Collect Your Money (Or Property)

How to Invest in Tax Liens | How to make money with tax liens | how to make money investing in tax liens | tax lien investing 101 | how do I get started with tax lien investing
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The final step in the process is to collect your money or your property. As I said before, if the homeowner fails to pay the property taxes in time, you get the deed (ownership of the property). But if the owner is going to pay, everyone must come to an agreement about the terms.

Make sure you have an excess of cash when investing this type of way, just in case the property you purchased needs repairs or there are more liens on the property. As the new owner, it’s your responsibility to pay those liens off.

Ready to Start Investing in Tax Liens?

If you like the sound of tax lien investing despite the risks, start looking into what areas you want to invest in. Then, connect with someone (like a real estate agent) who knows what they’re doing and can give you a little bit of guidance as you embark on this tax lien investing journey.

Have you had any luck with tax lien investing? Let me know in the comments. And don’t forget to share this with your investing friends.

Author

Founder at The Ultimate Freelance Guide and author of The Ultimate Guide to Using Blogging to Boost Engagement and Drive Sales and Copywriting vs. Content Marketing: A Guide to Understanding the Difference Between the Two and Using Both for Maximum Engagement. Her work has been featured at USA Today and Small Biz Daily and she's written for clients like Columbia, LifeLock, eSurance, Anthem Health, USAA, Rev.com, Princess Cruises, and Rodan + Fields, among others.

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