Tax lien investing is a tried-and-true investing strategy that has been around for centuries. Tax liens were created by state governments to help collect unpaid property taxes. An overlooked facet of real estate investing, tax liens are a high return investment and are a great addition to any investor’s portfolio.
How Do Tax Liens Work?
Every property owner is required to pay property taxes in the United States. Property taxes are used by local governments to fund public departments such as police, fire, schools, parks, and the construction of roads. Property taxes are a primary income source for many counties. Therefore, when a property owner doesn’t pay their taxes, the government needs to find another way to collect that money.
When a property owner doesn’t pay their taxes, the county places a tax lien on the property. The county will give the property owner time to pay off their delinquent taxes, but if they fail to pay, the lien will be sent to auction. The county will hold a public tax lien sale or tax lien auction to sell the tax lien certificate. The certificate price is composed of the delinquent taxes, plus any fees the county paid to bring the certificate to sale.
Usually, anyone can attend a tax lien sale. When someone purchases a tax lien at auction, they are not satisfying the property owner’s tax liability. They are simply buying a certificate for the amount of the property taxes. This is beneficial for the county because it allows for them to continue to fund public programs.
So How Is Tax Lien Investing Beneficial For Investors?
As with any other delinquent payment, the property owner will be penalized for the delinquent taxes. This penalty passes directly on to the tax lien investor. The return is realized when the property owner either pays their taxes or if the property is acquired.
If the property owner pays their delinquent taxes, they are responsible for paying the amount of the certificate, plus any accrued interest and fees. The most attractive component of tax lien investing is that you will get your money back, plus interest when the certificate is redeemed.
When the county receives the payment from the property owner, they send a redemption check to the investor. The payment typically comes in the form of a check or ACH.
If the property owner does not pay their taxes, property acquisition becomes possible. Many real estate investors pursue this investment strategy because it is possible to acquire properties for a much lower cost than if they were buying it on the traditional market. We’ll cover property acquisition in our next blog post!