What are the Five Best States for Yield on your Tax Lien Certificates?

What are the Five Best States for Yield on your Tax Lien Certificates?
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It’s almost June and the tax lien certificate auction season is about to finish up.  From Florida to Maryland, it’s been a busy month of buying and I hope everyone did well with their respective bidding.  If you’re new to investing in tax lien certificates, I wanted to give you a two part series on the best states for earning yield and for safety (part II).  It’s just my opinion given the current competitive environment, so I’m happy to hear your thoughts on where to find the best yields or safety in the tax lien market.

Yield in the tax lien certificate market is a function of risk and competition.  Just like any investment, the higher the risk…the higher the rates.  The tax lien auctions work the same way.  You’ll find that those properties that are less likely to redeem and/or result in a profit will go for the highest statutory rate.  In fact, counties would be better off not having a top statutory rate if they wanted to sell all of their liens.  Often times, the risk is so high, that there are no buyers even at the top rates of 18-24% and thus the counties end up with the tax deeded properties, themselves.

Most tax lien certificate auctions are well-attended.  However, with the shear volume of available certificates, there often is not enough competition to buy every tax lien available.  This is an ideal situation for the investor.  I’ve seen auctions where, at the end of the day, all of the bidders had run out of money and the last liens all went for their maximum rates.  It doesn’t happen that often, but it’s well worth to keep a bit of a reserve and sit out the entire auction to perhaps pick up some great properties at a high yield.

OK, here are my five top yielding states for tax lien certificates:

Iowa

It’s not because it has the highest statutory rate of 24% that makes this number one on my list, it’s that you can actually pickup tax lien certificates at this rate at many of the auctions.  It’s a function of competition, as discussed before.  Iowa isn’t the easiest destination to get to and the lack of volume keeps many of the larger funds at home.  If the county uses a rotational/random bidding method, you’ll need to do due diligence on alot of properties for when your number gets called.

Georgia

I usually don’t buy tax liens to own the property via tax deed.  I’m personally more risk-adverse and just want to earn a good return on my investment and not deal with any properties on the backside.  Georgia tax lien certificates have me on the fence because there is a high likelihood you could get the property.  However, the 20% annual return certainly makes it worth my time.  I tend to focus on properties that are owner-occupied and will redeem so I can lock in the rate.  It’s an overbid state, so the risk is much higher if you don’t do your homework–you have a much higher chance of losing money if you received the deed because your lien-to-value ratio will be that much higher.

Washington DC

This was off my list for quite a few years because there was so much competition for liens in DC that the bidding (it’s also an overbid state) was off-the-charts.  However, in the past year, the overbids have come down to just a fraction over the initial bidding which means that you can truly earn close to 18% on your tax lien certificates.  DC has also cleaned up their act somewhat on returning redemptions (it was taking them almost 4-5 months to get back your money last year).

New Jersey

This might be my most argued about list.  The top rate is 18% but good luck getting it at the auction.  There’s alot of competition out there.  Why is this on my list?  Because you will earn 18% on your subsequent taxes.  It’s all about strategy.  You need to pick liens that will take a while to redeem so that you can consistently buy the subsequent taxes and start earning that full rate.  This will quickly make up for any discount you had to bid at the initial auction.

Maryland

Maryland rounds out my top 5.  It has a great advertised rate of 20-24% depending on the county.  However, it’s an overbid state and that means that your effective yield can get dragged down the higher the overbid (called the “high bid premium” in MD).  Yet, it comes back to strategy and competition.  If you do your homework, you can find those properties and counties where the competition is limited and the overbids are minimized.  The Maryland housing economy is one of the weakest in the nation and that has alot of deep-pocket investors on the sidelines.

Hope that helps if you want my no-BS opinion on where to find yield in the tax lien certificate market.  My next article will be a bit closer to how I invest–for safety and not necessarily for high yield.  Feel free to comment below on your thoughts or questions or visit me on my Facebook Page.  

 

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