Investing in a number of markets can be an excellent way to bring in another income and even save for retirement. Investing in real estate is a popular choice, but a lesser known type of real estate investing is investment in tax liens. Many people are unfamiliar with this relatively unknown and obscure corner of the real estate market. But, although investing in tax liens can be risky, if you do it well it can also be very rewarding. To get started with investing in tax liens, you first need to understand what they are and how you buy them. Once you get to grips with the technicalities of the market you could start making some sound investments.
What Are Tax Liens?
A tax lien is the right to foreclose on a property when a property owner fails to pay their taxes. The municipality that owns the tax lien can sell it on to others, auctioning them off. To buy a tax lien, an investor pays the taxes owed by the property owner in return for the right to collect the money, plus interest, back from the owner. In the United States, the interest rate ranges between 5% and 36%, depending on the state. The property owner usually has to pay the taxes and interest within 6 months to 3 years. If they don’t, the lienholder can foreclose the property and take ownership.
How Do You Buy Tax Liens?
You can buy tax liens at auction. These auctions are either in person or over the internet and can work in different ways in different areas of the country. One method of bidding for tax liens, called “bidding down the interest rate” involves the municipality establishing a maximum rate. The winner of the auction is the person who bids the lowest below the maximum interest rate. Another method is bidding a premium on the lien, with the lien going to the person who bids the highest premium. Look for the best guide for buying tax liens online to make sure you educated yourself fully about the different methods of buying tax liens.
What Do You Need to Know Before Buying?
Investors who are interested in buying tax liens should make sure that they research both the practice of investing in tax liens and individual tax liens. Before bidding on a lien, it’s important to research the property and its neighborhood. It would be a mistake to buy a lien that you would be unable to collect on. Leave your research as close to the auction as you can. Otherwise, you could be researching properties that will soon be gone because the property owner has paid their taxes.
It’s also extremely important that you know your responsibilities for the area in which you have bought the lien. You might have to let the property owner know you own the lien, and you will need to know the lien’s expiration date. You can also consider paying taxes on the property, to make sure that no one else can buy a lien and have a claim to it.