Tax Lien Investing Guide: Getting Started

Investors always seek new opportunities to maximize their financial gains while minimizing risk. Tax lien investing is nothing new, but it is growing in popularity each year.

Below is everything you should know about what tax lien investing. If you are interested in getting started, IRAR can assist you with tax lien investing and other real estate-related investments.

What Is Tax Lien Investing?

According to the Internal Revenue Service, a tax lien is a state or federal government’s legal claim against a property when someone does not pay their taxes.

For example, the state or federal government can put a tax lien on real estate if the owner has not paid income taxes. Or, the local government can place a lien on a property if the owner has unpaid property taxes. In other words, A lien is a legal claim against assets that are typically used as collateral to satisfy a debt. 

The tax lien process begins when the person receives a notice about their tax debt. This is called a demand for payment. If the taxpayer does not pay off the debt or resolve it with the tax authority, they may put a lien on their assets, including the real estate.

Tax liens are purchased usually through auctions held at a physical location or online. Usually, the investor who accepts the lowest interest rate is awarded the lien.

How Does Tax Lien Investing Work?

Tax lien investing is purchasing a delinquent tax lien on real estate. You can earn profits as the owner pays interest on the lien or from liquidating the assets that back the loan. As the investor, you have the right to deed of the property if the property owner fails to pay the tax amount.

They also must pay fees during the redemption period, typically 120 days. Usually, the person has had months or years to pay the taxes. So, the extra four months typically do not alter the situation.

If you’re interested in investing in tax liens with your self-directed IRA, review these advantages and disadvantages:

Tax Lien Investing Pros And Cons

Pros of Tax Lien Investing

Most tax lien investors make their return on the interest rate paid by the tax lien. The maximum interest rate on a tax lien investment in Florida is 18%. In Alabama, the top rate is 12%.

The rates of return can change from state to state. Do your due diligence before you purchase a tax lien.

Note that profits do not always translate into yields that high. For example, most tax liens sold at auctions produce between 3% and 7% profit. However, some tax lien investors make more or less, so you should talk to your real estate investment advisor to decide if it fits your retirement portfolio.

There Is An Expiration Date

If the owner does not pay the taxes owed at the end of the redemption period, you can start foreclosure process to take the real estate. But that usually will not happen; when someone’s home is on the line, most people pay what they owe. Remember that tax liens are first in line to be repaid, even ahead of mortgages.

There Is A Guaranteed Return

While interest rates vary by state and community, you will know what your return will be. Tax liens offer a stable return rate if you have done your due diligence and invested in a profitable property.

Enjoy Diversification

Diversifying your retirement investment portfolio is easy by purchasing several tax lien certificates in different communities. You do not need to invest much money, so you can invest money into tax liens in many areas.

Often Low Cost

Most tax liens do not require a heavy down payment. Some tax liens are available for just a few hundred dollars.

How To Get Started In Tax Lien Investing

If you are considering tax lien investing, you need to do a lot of research. Or rely on a trusted tax lien investment advisor to do the research for you. Many tax lien experts recommend avoiding specific properties, such as environmental damage. Remember, if you need to foreclose, you own the property.

So, have a firm understanding of what you are buying before you start investing in tax lien certificates with your IRA. Know where the property is located and the kind of neighborhood. You should be sure you do not buy an impossible lien to collect.

If you are nearing retirement, remember that you will need to take distributions from the IRA investments. The liquidity of your assets may have an impact on distributions.

Next, see if the property has accumulated any other tax liens aside from the one you may want to purchase. Look at tax sales that happened recently and what similar properties sold for. If the real estate has other liens, getting the deed may be more challenging if there is a foreclosure.

The best tax lien investors obtain a property list and perform due diligence well before a tax sale. Sometimes many properties are gone because the tax bill is paid before the sale.

How Risky Is Tax Lien Investing?

Some consider tax lien investing less risky than investment properties. You do not need to maintain the property or chase rent from tenants. However, there is a chance the tax debt will not be paid.

Bottom line is that all investments have some level of risk. You have to feel comfortable with yours. As with any investment tax lien investing requires you to do your due diligence. Educate yourself on the pros and cons of tax lien investing before making a purchase with your IRA.

How IRAR Can Help With Your Tax Lien Investing

Tax lien investing can be profitable, but it's important to conduct due diligence. So, be prepared to do your homework.

IRAR cannot advise you on how to invest in tax liens, including which properties could be best for your desired level of investment risk. However, we can help you access your retirement dollars for investments in Tax Liens. Schedule a free consultation to learn how to transfer funds to a self-directed IRA and start investing once you are sure this investment is for you.