Are tax liens worth it if you only have a small amount to spend?

14 Replies

Tax liens can provide some great ROI, with some states over 15% annually and some even over 20%, but are tax liens worth the time and energy unless you plan on dumping $10k+ into them?

I'm trying to get started in real estate investing and I can't decide if I should put my money into tax liens or try to buy and hold a rental for cash flow. I don't have a whole lot of money to get started, only about $7k cash right now.

I listened to the podcast about tax liens and I've done quite a bit of research on them, so I'm just wondering how well the tax lien strategy has been working for people.

@Paul Spangler  

Having started with 3k myself, it turned into an average 33k/yr income and should be getting close to having just tax lien interest invested soon...so they are paying me interest for loaning their interest back to them!  No skin in the game, only profits!

Yes you can start with modest amounts of money. I started with two liens for about $5k total. I wound up foreclosing on both of them and made about $50K on them.  That is not at all typical but it can happen. 

Sometimes a tax lien may redeem in a month or two and while the interest rate is high, it doesn't add up to much if it is only for a month or two. My first check I got this year was $4.52 in interest. But if it was in my bank I would have earned perhaps $0.50 in interest. As long as your expectation are realistic it can be a good investment.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Paul Spangler  

  tax liens are a good ave for those with limited cash... Although remember there is the flip side not all tax liens redeem and the property may not be worth anything.

so its not a guaranteed thing.. but with work and knowledge up front you can mitigate that.

also depending on where your at  locals can and will bid the return down into single digit.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Paul Spangler   Tax lien investing has a few strategies for an investor. Most people use it for parking money and earning an above average interest rate. If you have little time or skills to be a landlord, a rehabber, or a deal maker - then tax liens could be good.

You will need time to do the research to make sure the property is worth the amount taxes you will pay if it somehow comes to a foreclosure action.  Except in Florida where the foreclosure just puts the property up for auction.

There is a lot to learn and tax liens are local in nature.  You need to become an expert in the local laws on tax liens and on the real estate values in the area too.

I started with less than $5,000 and now invest in tax liens in an i401k that I rolled over and use regular savings. I have a full time job outside of real estate and I have two small companies too.  Tax liens work great for my personal time and risk constraints.

@Jean Norton  

  Well that return will take care of one lunch   LOL... if you have mass and scale its a nice play I have been to a few of the sales, I was used to CA tax deed and the tax cert sales were wild and the good ole boy  major players defiantly controlled the room and cherry picked the certs... Best part that I saw was the tax collector said " anyone just wanting to buy 5 or fewer come up here now and pick your 5 and you can go home"  I guess that's what they call over the counter.. I bought 5k worth and I am not sure I ever got a redemention I kind of lost interest and never tracked it.. Maybe there is money in the found money fund of that state that belongs to me  won't be the first time I have found money in a state I forgot I had or lost  track of :)

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Jerry K.  

  the sales I attended   ( hinds county MS and RAnkin  MS) moved so fast that you really would need a team to track and understand what was coming up.. the certs were gone I a matter of seconds ... the locals all were up front they got 80% of them in kind of a hand out routine.. only occasionally did one go to the rest of the room say 50 people. I had brought 50k with me to bid and only spent 5k buying ( well not really knowing what I bought probably junk) and packed it in and went and had some BBQ and soul food   :)  In your market is the sale a little more organized and at a pace that you can identify the cert for sale with the property that is associated with it... in those counties in MS they sold oh probably 10 to 20 thousand certs in 3 days... it was a mad house..   I would think outlier little counties could be a nice place to do this were you don't have all the competition and there are not thousands of properties to check out.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Without a lot of research, you can easily lose your money in Fl tax certificates.  I checked a small vacant lot next to a property I have: lot is "worth" maybe $4-5k, there are 5 different tax certificates out on it now, totaling about $8k.  If you bought this year's certificate, for about $600, you wait 2 years, then to collect you have to pay off all the other certificates along with a few hundred in fees, then the clerk sends it to auction.  No one will buy it for the approx. $9-10k in taxes (you've shelled out) and fees.  So, you get $4k lot for the bargain basement price of $9k.  Results vary of course, but it takes a bunch of research to verify  safe certificates, which will usually get bid down to less than 2% interest (5% over all minimum though, if ever redeemed).  I know @Jerry K.  makes it work with larger amounts of money, and good systems.  But for me personally, it's just not attractive.  Be advised, it's not risk free.

@Wayne Brooks  

  I consider myself fairly versed at many RE investments.  And my experience was in TAx Deed. and that is like foreclosure auctions very structured you know what your bidding on and once you own it you can sell it.. ( we got title to insure day we got the deed) not all title companies will do that.. Like FATCO at the time in CA would not insure until you owned it 5 years..

any way so I thought I would do the certs but like I said it was controlled mayhem. And I forgot to say.. in Rankin county this guy gets up and makes an announcement to the crowd and say I am going to bid every Cert down. and sure enough the hour or so I sat there he bid every cert and bid them all down to 5 to 6%  I did not stay long as I said.. but I bet he had a few mil with him and spent it.

there was an article in Forbes a few years ago  well maybe more than a few.. But it was about a company ( Hedge fund type) that moved into FLA  tax certs and bid everything down to 5% or lower.. gist of article was  is this a smart investment?

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@Jay Hinrichs  I mainly buy through online auctions. But I do attend an occasional local auction with live bidding. I still see the "preferred" locals getting the best properties with liens.  The auctions have a few thousand liens and is pretty organized. Many Illinois counties have a hybrid online auction system.  You go to the courthouse and everybody bids on a computer.  I'll post a link to a video someone put on youtube from a county near Peoria, IL a few years ago. Pretty different to hear only keys clacking as each lien is auctioned in silence.

The small countiesith open outcry bidding seem to have their locals covered too. With fewer liens the known locals seem to get the best ones. 

I like to visit Arizona and Florida so I get to know the areas then bid online.  I'm a "data" kind of guy so I get all the resuilts and do analysis to see what the competition is doing online, what types of properties fget the best rates, etc.  I talk about that on my BP blog inthe link below. 

This type of tax lien investing is a waste for most people, but it works for me.

@Jay Hinrichs  

Exactly.  I think here, 90% of the certificates go for less than 2%. The "trap" junkers get passed over, so anything that can be had for above 5% likely has some "issues", and your money could go forever down the drain.

@Jerry K.  

  well I guess Mississippi is not up to speed on online bidding although this was 07 when I did this they may have graduated.. I know when CA counties when to Bid or Assets that took a lot of the fun out of TAx deed sales here..

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Paul

Tax lien investing is like any other type of real estate investing in that it requires time, training, due diligence and action.  After that, management of your porfoilo.  Tax liens can be very profitable if you take the time to learn the business.  I have bought a few in Iowa and they have all redeemed with a profit.  Iowa pays 2% per mo.  It is true that the ownership interest in the property can be bid down in this state, but the interest rate remains the same.  Again, due diligence is the key.  No matter what avenue you chose be sure that it excites you enough that it keeps you up at night trying to learn all you can about it.  Just remember that all the studying and training without action results in zero profit.

@Wayne Brooks

I will say tax lien investing at today's market is just like you prescribes the way @Jerry K.   does,

You got to have "larger amount of money & good systems".

I myself do not see any investors with limited cash can get a good living out of it. Unless he/she get a good property out from the lien each time.