How Much Can You REALLY Make Buying Tax Liens and Tax Certificates

With so much hype about tax certificate and tax lien investing, the question comes down to how much can you really make from buying tax liens?  The advertised, statutory rates in some states are as high as 24%.  Most states fall somewhere between 12% and 18%.

But, can your really earn that much?  If that was the case, wouldn’t just about everyone put their investments and retirement dollars into tax certificates?

The truth is, you can make that much on your investment dollar, but you could be putting your entire investment at risk.  This is especially true in bid-down states – states where investors at the auction bid down the rate of interest they are going to receive.  Under normal economic circumstances, if you only buy those liens that are at the max rate, you’ll be buying a significant amount of worthless or nearly worthless properties.  The rates are bid lower for a reason—everyone stays away from the highest risk properties.

This is also true at auctions where you bid a premium over and above the tax amount (Overbid States).  Generally, these overbids do not receive any interest, so because you are investing more capital that is not earning interest, your overall return rate decreases.  For example, if you bid on a $10,000 tax lien on a property at the Washington DC tax auction, and because of competition, you bid a $10,000 overbid on top of the $10,000 lien, your return would be half of the statutory rate on an annual basis.  Thus, that 18% annual return is now only 9%.

Where you can receive those high interest rates are at round-robin auctions.  In these auctions, you will receive the top rate as each lien is offered to investors in a randomly-selected order.  Unfortunately, this type of auction really limits the amount of liens you can buy and you will probably miss the opportunity to purchase most of the certificates you really wanted.

What about gains on the real estate you might acquire? 

This is probably the most hyped part of tax lien investing.  The truth is, most liens redeem before you ever even have the chance to receive a deed.  And, if you do actually receive deed to the property, there is a strong likelihood that there are major issues with the property—structural, municipal fines, low values.

“But, I heard you can make fantastic returns of 30, 40 or even 50% and higher investing in tax liens” 

OK, how does this hyperbole get out there?  Well, it’s true.

Most of these liens redeem within a few months.  Let’s say you own a Florida tax lien certificate that redeemed in one month. Congrats!  You just earned a whopping 81%!

But, Florida only gives out a 5% penalty and the max statutory rate is 18%.  How did I make 81%?

It’s because those super-high return calculations are annualized.  Thus, you have to assume you can make that 5% return again and again thru the course of the year.  Unfortunately, the Florida tax auction only happens once a year and other auctions are held sporadically throughout the remaining year.

So, the moral here is that if the old adage of “it sounds too good to be true” rings in your head about tax lien investing; just be sure to understand how those returns are calculated.