Tax Liens: A Passive Way to Invest in Real Estate
Tax liens are a lesser-known way to invest in real estate. Like any investment, tax liens have advantages and disadvantages. Let’s explore this unique way to indirectly invest in real estate.
A tax lien is a first position lien that is placed on real estate when property taxes go unpaid. Property taxes are used to pay for schools, roads, emergency services, and a multitude of other things. When taxes go uncollected, counties have a system for collecting those taxes by offering them as an investment. Most counties will hold an annual auction at which they sell tax liens to investors. In exchange for buying a tax lien, the investor is guaranteed a set rate of interest, or after a period of time, known as the redemption period, they can foreclose on the property.
What are some reasons to consider investing in tax liens? It is a very passive investment. Investors do not need to deal with tenants and sub-contractors, and you can even invest from your computer. The interest rate tax liens earn is guaranteed by state law. On rare occasions investors can end up owning real estate at a low cost. You can utilize personal funds or retirement funds to invest in tax liens, and most tax liens can be purchased for hundreds or even thousands of dollars, so the funds required to get started can be minimal.
What are the challenges most tax lien investors face? It is very competitive. Tax lien sales attract big money, which almost always means plenty of competition. Some tax liens are secured by worthless or unusual property that most investors would not want to own. Every county that holds tax lien sales has the freedom to run their sale as they see fit. This means one will encounter unique rules and requirements for virtually every sale. Plan on doing some research to find counties that work for your investment goals.
New Direction Trust provides education on alternative investments like tax liens, so please feel free to visit our website if you want to learn more.