Passive income: tax liens vs rentals

10 Replies

I an a newish investor and new to BP. My question:

In looking to build passive income. . . why would I choose a rental over a tax lien? I'm here in Kentucky, and the interest return rate is 12%. Which is what one can reasonably expect from a rental, a bit more or less, right? Yet, there's no upkeep, no finding renters, no roof flying off, etc. Plus you get the bonus of a possibility of getting the house if the tax lien isn't repaid. The upside I see to the rental is the appreciation of the house.

Of course, I've never bought a tax lien before, so I don't know what that's like. But from the outside, it seems easier.

Seems like an easy choice: tax lien...so what am I missing? What else do I need to consider?

Thanks!

Frank

Originally posted by @Frank D'Amato :
I an a newish investor and new to BP. My question:

In looking to build passive income. . . why would I choose a rental over a tax lien? I'm here in Kentucky, and the interest return rate is 12%. Which is what one can reasonably expect from a rental, a bit more or less, right? Yet, there's no upkeep, no finding renters, no roof flying off, etc. Plus you get the bonus of a possibility of getting the house if the tax lien isn't repaid. The upside I see to the rental is the appreciation of the house.

Of course, I've never bought a tax lien before, so I don't know what that's like. But from the outside, it seems easier.

Seems like an easy choice: tax lien...so what am I missing? What else do I need to consider?

Thanks!

Frank

You may have trouble utilizing leverage. I'm not sure, but I don't know that you could buy a $100K tax lien with $20K out of pocket. There are many benefits to rental properties above and beyond the initial cash-on-cash returns. You already mentioned appreciation, but a few other big ones are the debt pay-down, interest deduction, increased rents and depreciation. Let's say you've got a $100K tax lien yielding 12% or $100K to invest in rental property that will yield 12%. Using 20% down on a commercial (5+ unit property) this would buy you about $500K worth of rental units. You may net the same $12K income (I would expect more out of a $500K rental), BUT the rental will throw off ~$15K of depreciation, meaning you don't pay any taxes on that $12K and also about $5K of loan paydown per year.

You should do more research on tax liens to see if any similar benefits are available in that arena.

Don't know Kentucky tax liens at all, but I doubt you can readily get 12%, and there is sufficient quantity. Otherwise why would the national boys be chasing Fl tax certificates at 0.5%, banking on the minimum one time (not annual) 5% return.

@Joel Owens

I do have about fifty k cash available. (I will,rather, after my main residence is fixed up and sold.) So you think either of these tax liens or rentals, are good for passive income in this range? If I had some more cash (maybe in the future) what options do you suggest looking into?

I don't know the Kentucky tax lien market or laws but several years ago I bought 3 FL tax leins via online auction just for fun. Now mind you these where very inexpensive liens...less then $400 for all. They paid 18%,18% and 16%. One paid off in a few months and I made a couple bucks...literally. I don't remember the exact numbers but it was a few dollars more then I bought it for. The 2nd paid off in less then a year and I made like $16 or something and the 3rd I forgot about until several years later when I got a notice the county office was trying to find me so they could send me my check...I had moved and not given a forwarding address and their check had been returned to them. I ended up making about $68 on that one but it took several years and I almost missed out. Now your talking a much higher investment so I would hope much higher returns.

On the rental side I have 2 I paid cash for...$12,500 & $10,800 already fully rehabbed and they rent for $550 each. I did lose 6k to a con artist and another 5k when the first one got vandelized but thats due to getting screwed by my original manager. I learned my leason the hard way but considered it part of my 'education' in remote rentals and now have a great manager local to the area that takes good care of my places. I am now buying my third for 5k and will put $1200-$1500 max into repairs and it will rent for $500-525. And I'm getting this one seller financed at only 3% interest and I only put $1000 down so my total outlay is less then $2500.

Based on this I'll take rentals over tax liens any day but hey, that's just me. If your interested in tax liens I'm sure alot of people make good money with them or I doubt they would be so popular. Just my 2 cents worth.

@Frank D'Amato

I have never buy Kentucky tax lien.

The Kentucky annual tax lien certificate auctions are held during between the months of July and October.All of the Kentucky county tax lien certificate auctions are held on location.The bidding method is a first priority sale followed by random selection.The county first allocates those certificates of delinquency for which third party purchaser’s requested a priority claim prior to the auction, the remaining tax lien certificates are sold, usually in predetermined lot sizes. The order of selection choice is determined by random drawing at the beginning of the tax sale. If a registered buyer is not present for the random drawing, they will be placed at the bottom of the selection list. The interest rate of return on Kentucky tax lien certificates is 12% per annum.The minimum redemption period is 1 year from the date of the auction.

The part that you have to pay attention is LOT SIZE. They range from 5 to 50( this depends on # of certificates of delinquency available to be sold ). You really have to do your homework.

From my 2 cents, there are nothing really passive either buying tax lien or fix & hold.

I invest in both. There are work, it's a business.

Originally posted by @Frank D'Amato :
I an a newish investor and new to BP. My question:

In looking to build passive income. . . why would I choose a rental over a tax lien? I'm here in Kentucky, and the interest return rate is 12%. Which is what one can reasonably expect from a rental, a bit more or less, right? Yet, there's no upkeep, no finding renters, no roof flying off, etc. Plus you get the bonus of a possibility of getting the house if the tax lien isn't repaid. The upside I see to the rental is the appreciation of the house.

Of course, I've never bought a tax lien before, so I don't know what that's like. But from the outside, it seems easier.

Seems like an easy choice: tax lien...so what am I missing? What else do I need to consider?

Thanks!

Frank

I am not an expert on tax liens but I hear there certain states you can only receive a prorated amount of return for the days the lien has been in place versus states that provide a min return even if the tax lien is paid back in 2 days. so this might affect your returns depending on when and what day you put your money to work and when you get it back out along with the time the money sits on the sidelines idly while it searches for the next deal earning 0-.75% in a checking/savings account.

On the rental end, like others have mentioned you may miss out on appreciation, and amortization of the loan balance, but the main difference I believe is the tax shield effect of depreciation. If you strategically plan your rental's between appreciation plays and cash flow plays you can sometimes create enough depreciation loss to offset most of your taxable income while still receiving cash flow from a month to month perspective.

If you have 100,000 annually in rental income or 8333 a month in gross rental income you can find a property(s) that still cash flow albeit a lot less that net -8333 a month with depreciation factored in to end up with a $0 tax liability scenario (no tax advice, consult a tax advisor).

There are pros and con's at the end of the day to each since rental's arent stress free either =/ so I would always default to have a balance of different products in your portfolio depending on your goals. There is a place for both.

Albert Bui, Lender in CA (#345453), WA (#345453), TX (#345453), and TN (#345453)
949-514-5106

@Frank D'Amato You have been given great information in this thread. @Tom Yung gave the low down on the KY process. The key things to note is that in KY most counties use the Random method. That means you don't get to pick the liens (properties) yourself. When your name is called it is for a batch of pre-selected liens.

So you have to do research on EVERY lien in the auction, have your mind made up on which liens you want and which liens you don't, then decide in a moment when your name is called if you want the entire batch of liens.

KY has some interesting rules on collecting tax amounts yourself, and how to go about foreclosing. Do a Google search on "KRS Chapter 134" and scroll down to the 134.300+ section where they talk about liens.

In addition, I saw where there is a statue that allows for a deposit (does not say if the deposit is refundable) of $10 per lien or $250 in total to bid on all liens in a county. If it's not refundable and you don't buy any liens, you're out that money.

Know these statutes before you invest. May be a lot of work and fees just to collect the interest thus reducing your 1% a month return.

Talk to a KY atorney who does tax lien collections and foreclosures. Tenants, toilets and termites seem like a "less work" option with rentals in this state over tax liens.

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