Seven Investors Who Should NOT Invest in Tax Liens

Seven Investors Who Should NOT Invest in Tax Liens
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Since starting this blog, I’ve gotten quite a lot of emails, comments and questions about investing in tax liens.  One observation I’ve made is that this investment is not for everyone.  There’s a lot of hype and marketing out there that makes tax lien investing seem to be a low risk, high return investment that just about anyone can do.  But, actually, tax lien investments are highly illiquid, time intensive and the high returns are sometimes associated with higher risk properties.

So, whom is tax lien investing NOT for?

  1. You want to spend all of your investment dollars in buying tax liens, tax certificates or tax deeds.
  2. You do not have much time to see the properties yourself and do due diligence.
  3. You’ve never invested in real estate let alone tax certificates before.
  4. You may need the cash within a couple years.
  5. You think it’s a great way to buy real estate.
  6. You want to buy a lien on your neighbor’s house because they parked an RV in their driveway.
  7. You bought a “make me rich” course from a TV ad or online pop-up.

If you don’t fall into one of the above categories, you’re well diversified with your other investments and you have the time and some basic knowledge of real estate, then tax lien investing might just be right for you.

If done right, tax lien investing can be a safe investment that produces a return well-above what you can get in a money market account and without the volatility of the stock market.  Most liens have a short life-span of a few months, so you can keep reinvesting your investment in other auctions and really ramp up your annual return.  For example, if you’re in the Midwest, you can buy Indiana tax certificates in a March auction, earn a good return and reinvest those liens that redeem in the Illinois tax auction (or in another Indiana county tax sale).  This is where you could make returns of 20, 30 or 40% annualized.

You can also invest in tax liens in a retirement account saving yourself from paying taxes on the interest you earn.  It’s a great way to diversify away from your stocks, bonds and other investments that are very correlated with the overall economy.

Finally, tax liens investments are great for private equity or family funds.  A portfolio of diversified tax liens can provide good returns that can be leveraged or securitized.

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