How to Make Money Buying Tax Liens

Learn more about tax laws and becoming a professional in the field with a masters in taxation.

Investment through tax liens is a fairly new idea, but it has yielded rich dividends for a number of investors. In fact, the phenomenon is hardly a decade old. It shouldn’t be seen as a “get rich quick” scheme but rather a sound investment with some risks. You should do your research before you get into this market because there isn’t a lot of knowledge available about tax liens, since they are fairly new.

How it works

The way tax liens work is that you, as an investor, will pay the property tax of someone else, who will need to repay you with interest. As everyone is aware, every homeowner will need to pay property tax. However, sometimes owners are unable to pay it. There is a fixed penalty that needs to be paid by the homeowner if they fail to pay on time. However, the government would rather get the money on time, in which case it will simply sell a tax lien to an investor. The investor will pay the government the full amount and he will get, over a period of time, the whole property tax paid by the homeowner along with the interest. This simple arrangement can give you up to 10% interest on your money.

As you can see, this is a simple win-win-win situation. The government gets the tax on time, the homeowner gets more time to pay the tax and the investor gets the additional interest on the amount that he has invested.

How you win

Up to this point, the concept of tax liens seems pretty straightforward. It works like the homeowner has borrowed from the investor at a fixed rate of interest with the government as the middleman. Now, what happens if the person is unable to pay the lien off? Some homeowners who have multiple properties and have seen the values of their property plummet may not really like to pay the property tax. Instead, they might decide to let go of the property.

In such cases, you will become the property owner. This can be both very good and bad for individual investors. On the plus side, you now have a property for which you paid just a few thousand dollars. If you can sell this off, you can make a very healthy profit. Very high percentages of up to 1000% are not unheard of in these cases. On the negative side, you will need to know about real estate and how to sell properties and you may not really prefer to do this.

The truth is, getting a property that will not be paid for by the owner is actually considered good in tax lien investment options. This is because investors find it very profitable to sell off distressed properties that they bought at just a few thousands of dollars. However, these are generally the exception and not the rule, so you shouldn’t invest in tax liens simply because you are looking to get lucky with some cheap property. Tax liens are held in an auction and you might just get lucky, but don’t make it your investment strategy.

Have you had any experience in tax liens?

Would you consider trying this?

Leave a Comment

{ 9 comments… read them below or add one }

DoNotWait

Are tax liens valid in Canada? I think it’s worth thinking about it.

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Kevin

I believe so but it something to look into

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DoNotWait

@Kevin,
Ok thank’s for the info! If anyone else already knows, please instruct me!

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Early Retirement Extreme

No experience, willing to learn.
The main problem is that procedures and regulations sometimes vary from county to county. It requires more footwork than most other types of investments, except maybe real estate.

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Evan

I’d love some specifics – where do you search for these tax liens? Do you need a broker? etc.

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Kevin

It’s pretty much all in person but some states do have the auctions online. It varies so much that the best place to ask is your county courthouse.

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Jacob

This is the real truth. Everybody can but not everyone will earn money on the internet. While the least educated person can ask a lot of useful information in such texts as the one in this post. Very nice article – thank you.

Reply

federal tax liens

Rules and regulations for tax liens differ in every state. It is important that before putting up an investment you need to study and understand these rules in order not to encounter problems in purchasing properties that are auctioned.

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David Bingham

I have two friends who are using this method of investment. One who recently received a property for under $500. And another has made $20,000 off a $5,000 investment. He said it best like this, “I wouldn’t expect a major return. Especially at first, but once you’ve developed a system. You can get great returns.” It can require a lot of homework to get that system working for you.

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