Is Real Estate Tax Lien Investing a Good Idea?

Last Updated on October 1, 2020

Is Real Estate Tax Lien Investing a Good Idea?

Real estate tax lien investing diversifies your portfolio, but it has its risks too. Investors like it because they can invest in real estate with a small upfront investment, and there’s a chance of a decent return, but there are many restrictions that make it worth less than many anticipate.

If you ask yourself ‘what is a property tax lien and is it worth it for me’ keep reading.

How do you Buy a Tax Lien Property?

Here’s the process.

Homeowners owe real estate taxes twice a year. If they fail to pay, the county needs to recoup the money, so they sell the taxes to investors – people like you.

Selling property taxes doesn’t mean selling the property. The county sells the taxes themselves, so essentially, you pay the homeowner’s taxes, in exchange for an interest rate. You are like the bank lending the homeowner money.

You buy the lien at an auction. But unlike a typical auction, the winner is the investor offering the lowest interest rate or the rate charged to the homeowner for paying the taxes late. Each state has a maximum statutory interest rate, but on average investors buy tax lien certificates with interest rates from 3 to 7 percent.

Investors buy the certificate and have 1 to 3 years to collect on it. The exact redemption period varies by state.

What Happens if the Owner Doesn’t Pay the Taxes?

If the homeowners fail to pay the property taxes before the redemption period expires, the investor may initiate foreclosure proceedings. This is rare, though. Most homeowners pay the taxes before it gets to this point.

The good news is, though, if the tax lien does initiate foreclosure, most liens have first priority when disbursing funds from the sale. The bad news is, there may be other liens on the property making it hard to collect your investment.

The Risks in Real Estate Property Investing

how do you buy a tax lien property

Like any investment, there are risks. 

  • Property tax information changes daily. If you do your research a few weeks before an auction and don’t follow up, you may waste your time at the auction because the homeowner paid the taxes just before the auction date.
  • Know the average bid down interest rate in the area. You may not be able to bid as much as you hoped if others bid lower.
  • You have responsibilities when you’re the tax lien holder. Each state has different requirements, but they usually involve notifying the homeowner immediately upon sale of the lien, and again before foreclosure (if it gets to that point).
  • If the certificate expires, you lose your investment. You can’t collect on it after that point.

Is Real Estate Tax Investing Right for You?

There is money in real estate tax investing, but just how much depends on the area. Is it right for you?

That depends.

Can you invest money for a year or two without seeing a return right away? Assess your risk tolerance too. What if you lose the entire investment (the homeowner doesn’t pay). Don’t count on receiving funds as a part of the foreclosure process – that’s rare. 

If you can risk the funds, though, tax lien investing can be a good way to diversify your portfolio, while helping homeowners get their finances back on track and not lose their home.