Tax lien investing is regarded as one of the safest real estate strategies out there. But as with any investment, there are risks. Tax lien foreclosure, low property values, or additional investment requirements can pose a risk to some investors. We’ll briefly describe why each of these could pose a risk to any tax lien investor.
Tax Lien Foreclosure
For those looking to only collect interest, property acquisition may pose a risk. Lack of preparation for foreclosure could potentially lead to lost money on a tax lien certificate. For the investor that is focusing on interest, we recommend focusing on single-family homes, properties with a homestead exemption, or properties with liens that are likely to be redeemed.
Tax Lien Property Values
There is a chance of acquiring a property that is not desirable or does not hold any real value. For example, an investor could purchase a tax lien certificate on a parcel of land in the desert of Arizona. The property is undeveloped and is not surrounded by any residential or commercial real estate. A good way to avoid this risk is to get an aerial view of the land. The aerial view will provide an idea of the condition of the property and the surrounding area and can prevent this risk.
Additional Investment Requirements
Another risk in tax lien investing also comes in acquiring the tax lien property through tax foreclosure. Because you are often buying a tax lien certificate most likely on a distressed property, it is common that additional investments need to be made to make the property marketable. A new roof, municipal liens needing to be satisfied, cleaning the yard, changing the locks, etc. There are countless ways additional investments may be required. When purchasing a tax lien certificate, it’s crucial to anticipate all exit strategies and set aside additional investment money in case repairs are needed.
There Are Risks For Every Investment
Each of these risks can be avoided through proper and thorough due diligence. We understand that you don’t know which details to pay attention to in order to avoid these risks, but we are dedicated to teaching our members how these processes work.
To be clear, due diligence doesn’t always mean that you will avoid risky situations, though. Some things are unpredictable, and you need to be prepared to solve a problem to make money. It’s often in sticky situations where savvy investors thrive and make the biggest profit. Don’t shy away from a potentially profitable investment just because the property needs some repairs.
Education, proper training, and a good team at your fingertips will help reduce the risk of losing money.