Tax lien investing has emerged as a profitable yet risky real estate investment strategy in recent years. With high interest rates and opportunity to acquire property for pennies on the dollar, tax lien investing tempts many aspiring investors. However, lack of expertise and awareness of the potential pitfalls often lead to disastrous outcomes. This article unravels the hidden intricacies of tax lien investing to help you maximize rewards and minimize risks.
Perform in-depth due diligence before tax lien auction
Thorough research of property and owner information is crucial before bidding on a tax lien. Check factors like property value, outstanding taxes owed, owner’s payment history and financial situation. Visit the property to assess its condition and neighborhood. Identify any red flags like dilapidated condition, unfinished construction or legal issues. This will help estimate redemption likelihood and calculate your maximum bid price.
Focus on areas with high owner equity and low redemption rates
Target tax liens on properties with significant equity buffer. Research statistics on redemption rates in different counties. Areas with over 80% redemption rates leave little scope for taking ownership. Ideally focus on areas with 60-70% redemption rates. You can find this data on individual county treasurer websites or through paid services like Tax Lien Lady.
Don’t get tempted by high interest rates alone
Some states offer interest rates as high as 18-36% on tax liens. But high rates are often due to low redemption likelihood. Calculate the effective ROI based on average redemption rates. An 18% lien with 80% redemption may only give 3.6% ROI compared to a 12% lien with 30% redemption giving 8.4% ROI.
Leverage tax lien certificates to reduce costs
In some states, buyers receive certificates upon buying liens and need not record deeds. This saves recording costs. Certificates are also easier to assign or sell. Evaluate if a state offers certificates or deeds and consider costs before investing.
Partner with other investors to diversify and share costs
Partnering with other investors allows pooling of resources to bid across wider areas. It also reduces risks through diversification. Costs like travel, research and legal fees can also be shared. Maintain clear terms of partnership and ownership transfer in case of foreclosure.
Tax lien investing provides attractive interest rates and opportunity to acquire real estate for a fraction of market value. However, investors must conduct meticulous research, accurately assess risks, target optimal areas and structure partnerships smartly. With the right approach, tax liens can become a lucrative investment avenue.