Passive income: tax liens vs rentals

[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

[Michael Seeker]

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.