In these next few posts, I will present you with a few Growth investments I’ve been using for decades to generate independent income. I call them “cash flow-optimized” investments because they’re not what you’ll typically hear from mainstream financial media or be sold by conventional financial planners who sell you products from which they make the highest commissions.
Also, understand that I provide these not as an exhaustive list, but rather to simply give you ideas of what’s available. There are many other investments to consider as well. As a rule, when considering investments think in terms of optimizing cash flow immediately, versus accumulating for the long haul. The first of these investments is tax lien certificates.
Tax Lien Certificates
As of 2016, there were 3,142 counties across the United States. Counties require property taxes to be paid so that they can fund the many public services offered to the community. Property taxes are a major source of revenue for the counties. If property owners fail to pay their property taxes, then there is a financial shortfall of revenue for the county, which will have adverse effects on the community. When property owner becomes delinquent on their property taxes, then the city or county in which the property is located can place a lien on the property.
A lien is a legal claim against the property for the unpaid amount that is owed. A property with a lien attached to it cannot be sold or refinanced until the taxes are paid and the lien is re- moved. A tax lien certificate is a first position lien on real estate. In other words, it’s the obligation to pay property taxes before any other debts are paid. A tax lien certificate is created by the municipality and reflects the amount that is owed on the property tax plus any interest penalties due. These certificates are auctioned off to investors.
Tax liens can be as purchased for as little as a few hundred dollars, and can be as high as hundreds of thousands of dollars. They can be purchased on residential or commercial properties, or undeveloped land. Investors buy them because, to remove the liens, property owners must pay off the lien with interest. In other words, tax liens come with legally mandated returns. They are among the safest and highest-yielding investments you can find for such small required amounts to invest. They pay an annualized interest rate return from between 12% to 18%, even as high as 36% interest per year. Think of how much interest your savings bank is paying you right now. You don’t have to settle for measly returns the financial institutions want to give you.
If a property owner fails to redeem and pay off their taxes, the investor can begin the foreclosure process and take the property. So you either earn a secured high interest rate, or by law, you own the property free and clear with no mortgage. If you do acquire the property, you end up owning the property for just the back property taxes, penalties, interest and foreclosure costs. By acquiring properties this way, you may resell them at market value or keep and rent them out. Statistically, only a very small percentage of property owners are foreclosed on the tax certificate liens. Most liens tend to be redeemed by the owner.
Interest accrues on tax lien certificates on a monthly basis or a maximum percentage per year counting each fraction of a month as an entire month, from the month of purchase. For example, suppose John purchases a Tax Lien Certificate for $500 at a tax sale in Maricopa County, Arizona, with an interest rate of 16%. The property owner redeems on the lien, paying the county $500 (tax amount) plus $80 (penalty amount). The county then pays John his original investment of $500 plus $80 interest, for a 16% return.
Here’s a visual of how the process works:
Tax liens are a socially responsible vehicle. They actually help the property owners because they extend the amount of time needed for the owner to pay his or her taxes. The amount of time in which the property owner has to pay his or her taxes is known as the “redemption period.” The redemption period can be anywhere between three months and four years and starts from the day of the tax sale.
Each year, up to $10 billion in tax liens are issued in the U.S. You’ll have a regular supply of liens to invest in. You don’t have to attend auctions in person to buy liens. More and more counties are making them available online, which means you can invest in them from anywhere around the globe as long as you have an Internet connection.
Investing in tax lien certificates is recession- and depression-resistant. Property taxes must be paid regardless of what the economy is doing. During times of recession, tax liens are actually more lucrative because there is a higher probability of acquiring valuable real estate for pennies on the dollar.
Tax lien investing requires upfront capital and will take at least 120 days to see a return on your investment. The key is to conduct your due diligence on the property and know as much as you can about the neighborhood and county.
There are a few potential downsides of tax liens to be aware of, including the following:
- No Interest Income: Interest charges are added to the tax bill, but are not paid until the homeowner pays off the tax lien. This means you don’t receive interest payments or any other income until the homeowner redeems the certificate.
- Foreclosure Risks: If the property is sold to pay off outstanding debt, you may not get your money back if other creditors have claims that take priority over yours. Check to see if there are any other liens against the home.
- No Liquidity: Once you buy a tax lien, your money is tied up. You can’t ask for your cash back. You don’t know how long it will take for the homeowner to pay off the tax lien.
- Worthless Property: If you buy a tax lien on a property that no one wants, the taxes may never be paid and your certificates will be worthless.
I should also note that tax lien investing is not technically independent, meaning you have to actively find, purchase, and manage liens. However, it can quite easily be turned into independent income by creating a team to do the work for you, as I’ve done. A number of years ago, I educated and delegated all tax lien investing to one of my outsourced assistants. Using strict criteria and a checklist, my assistant researches and secures liens on my behalf and I pay her 10% of all profits generated. By delegating, I’ve turned what once was a three to five-hour per month active income strategy into a completely independent stream of income for myself. As Albert Einstein said, “Know the rules of the game and play it better than everyone else.”
In my next post, I suggest a few further growth investments that I’ve used for years in order to generate independent income.
I’d love to hear from you. Have you had any experience, or known anyone, who’s invested in tax liens? What has been the outcome for them? Thank you for sharing.
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