Today, the traditional stock market is not the safe and sure investment it once was. The market continues to have regular ups and downs and sometimes these swings can be dramatic (and for some of us, dramatically bad!). More traditional, safer forms of investment do not produce very good returns, which does not make them very attractive investment options, which has left many investors looking towards alternative investments that offer the potential for a higher rate of return.
On such type of investment that has been gaining some popularity amongst educated investors is tax lien investing.
What is Tax Lien Investing?
Tax liens are levied against homeowners who owe a significant amount of back taxes. These essential bar the homeowner from selling or refinancing their homes until the back taxes have been paid.
Municipalities issue certificates for tax liens and these can then be sold to the highest bidder at an auction. This is where they become an investment instrument. Sold to the highest bidder at live or online auctions, these tax liens are grouped together and the city is able to recoup the taxes owed to them.
Liens are placed on property of all types, including residential, commercial and even unimproved land. This gives investors the ability to choose which types of properties they wish to invest in.
Investors will typically pay the agreed-upon amount for ownership of these liens, and property owners are then informed of the new holder of the lien and it is up to the investor to collect on the lien or begin the process of selling the property. Repayment of the lien to the new owner usually also incurs interest as well, so payment arrangements are often set up between property owner and the holder of the lien.
Pros and Cons of Tax Lien Investing
Tax lien investing is not recommended for the novice investor as it requires a bit of know-how and you take quite a bit of risk of substantial losses with this type of investment. On the flip side, the potential for big returns is also there, which is why it is an attractive option for a seasoned investor who is looking for something different.
There are a number of cautions that anyone who is considering tax lien investing should take into account. To increase chances of success, it is almost imperative that you have at least a decent understanding of the properties who's liens you are taking over. There is the risk that these investments will fail as the owners do not pay or the property cannot be sold off. Property with tenants with a bad history of making payments, in a bad area of town, or that is rundown, is not a good choice of property to invest in.
With the volatile state of the stock market today and the relatively low rate of return on more traditional (and safer) investments is causing investors to branch out and look at different, alternative types of investment products. Tax lien investments are one such alternative investment product. This type of investment has the potential to provide very healthy investment returns, but they also have a lot of inherent risk due to their nature as a debt-related investment instrument.