What if I told you that there is a risk-free way to earn 10-15% interest on your investment, with the potential for much greater earnings? What if this investment was backed by the government, available in every state in the US, and easy to employ?
The best kept secret in the investment world is something called a tax lien. I’m guessing you’ve never heard of it–and even I still don’t know what the word “lien” means. Most people have never heard of tax liens, since the government is exceptionally poor at marketing (except when it comes to campaigning for reelection). Financial advisors never tell you about tax-liens, since they won’t make a commission. The $49 eBooks you’ll find online tell you information that’s already available for free–but only if you’re interested.
The #1 rule of investing is to not lose money–something that seems easy to do but is surprisingly difficult. If you know what you’re doing and do a little research, tax liens are safer than any other investment.
To explain what tax liens are, I will first explain why they exist, and what function they serve. Taxes are critical to society. Without taxes, we couldn’t have roads, schools, gas stations, electricity, national defense, welfare programs, etc.. But what makes people pay their taxes on time? Sure, if I didn’t pay them at all, I would have the IRS down my throat–but that process takes at least several months, and often prolongs itself for years. What if, one day, I decide to pay my property taxes a year late? Who’s going to stop me? Meanwhile, the government ,
As in any other area of life, you pay a penalty if you’re late. The county charges an interest rate on overdue property taxes; this interest rate varies by state. Each state has a different system–in Texas, for example, you pay 25% regardless of whether you are a week or 2 years late on your property taxes. If the government didn’t create a penalty for late taxes, who would pay their taxes on time?
The only problem, however, is that the state treasury can’t afford to wait for taxes to trickle in whenever property owners get around to paying them. If property owners are willing to pay the penalty, they won’t pay their taxes on time–but the state couldn’t balance its budget that way. This is where you come in: you, the investor, pay the government the original tax, and in return you get to collect the principal plus the penalty. (For example, let’s assume that John owns a $100,000 property, and owes $1,000 in property taxes on it. He pays his taxes 1 year late, incurring a penalty of $140. The investor pays the government the $1,000 when the taxes are due, in return for the right to collect the $1,140 that John will later pay.).
A “tax lien” is a lien on the unpaid taxes-basically, you pay the unpaid taxes, and collect the interest rate whenever the person pays.. This is backed by the government; at worst, your lien gets paid off immediately, and you don’t make too much interest (though if you lived in Texas, you would make 25%). Your investment is quite secure.
So what if John decides to never pay his taxes? Unfortunately for John, the investor can foreclose on his property and gain title to it if John doesn’t pay within a specific time period (usually around 3 years, but the period can vary from state to state). By paying John’s $1,000 property tax for 3 years–amounting to a $3,000 investment–you can gain his $100,000 property, or at the very least, gain back your $3,000 plus whatever penalty John owes. In fact, a tax lien trumps a foreclosure–someone might pay $75,000 for the property at a foreclosure sale (if John didn’t pay the bank back on his mortgage payment), but the tax-lien investor would still own the property.
Does that happen too often? Of course not. Who would let their property go for a pittance–eventually, John will grit his teeth and pay his taxes. However, there are an endless number of long storeis–divorce, moving, negligent attorneys, you name it–that sometimes allow the investor to gain title to the property. At any rate, you will still get the promised interest rate on your tax lien.
If tax liens are such a good deal, a) is it possible to lose money, and b), John must be a drug dealer, not a respectable person, if he’s going to risk losing his house for not paying taxes?
The answer to a) is, unfortunately, yes. There are a few states where you aren’t entitled to your principle, and you should stay away from those states. Furthermore, in most counties, you win tax liens by bidding on them in an auction. Other investors like yourself bid on the same liens as you; if two investors want the same lien, the highest bidder wins. If you want John’s $1,000 lien, another investor might come along and bid $1,100. That extra $100 he paid–the premium--isn’t guaranteed; you are only guaranteed to make back the original tax amount, or the $1,000. For example, if John pays back his lien 2 months later–paying a penalty of 2.3%, or $23–the second investor would only make back $1,023, losing $77. Therefore, when buying tax liens, don’t bid too high! Never bid more than a few months’ worth of penalty: if John pays his taxes promptly, you won’t lose much money.
The other way to lose money on tax liens ties into Question b). The answer to question b) is “no”; star athletes, celebrities, and politicians get tax liens all the time. In fact, there have even been tax liens on the Sheriff’s department and post office! Construction companies like to not pay their taxes until the job is finished, and the deal is done. In sum, there are any number of stories, and any number of ways for people to get tax liens-and any number of ways for you to make money.
However, if you do bid on a crack house, John might not pay back his taxes, and you would foreclose on the property. If you wouldn’t want to own the property, don’t bid on it! Furthermore, the government has weird subdivisions of parcels of land–a tax lien might be on a drainage ditch, or a 2’x100′ strip running next to the highway. In fact, I’ve read a story of a tax lien being levied on an apartment that hadn’t been built! In that case, no one is going to pay back the lien, and you will be the proud owner of that deed. Great. Now you are the proud owner of a ditch on the side of the road. If you don’t want to go to title, you are out on your investment. Therefore, stay away from those types of properties (they’re pretty easy to spot, as they are designated as “unbuildable strips” at tax sales.)
And there you have it! Different counties have different methods of selling tax liens: most are through auctions. Do your homework, and you can make a solid investment!
Do you want to know why Warren Buffett is the 2nd rich person in the world? Because he knows how to invest. Do you want to know why the stock “experts” aren’t Warren Buffett? Because they don’t know how to invest. This is important to get out of the way before we start talking in earnest about investing-don’t listen to any of the “experts” out there, since if they really knew what they were talking about, they would shut up if they knew what was good for them. Did Warren Buffett stop making millions in order to write a book about success in the stock market? Of course not! If there are people out there telling you what to do, that means they think they can make more money off of you than they can off of their amazing investing techniques. [So what am I doing? Well, I do it for the fun of it-who needs money to be happy?]