If you’re a new investor, then you might be intimidated by the high costs of investing in property. Owning real estate comes with many responsibilities, including on-site maintenance, the collection of rent and much more. Even after you decide to pour your savings into an investment opportunity, you might find yourself without enough renters to make a profit. There are many reasons an investor might be looking for an easier option, which is why tax lien properties have become quite popular.
Table of Contents - The Benefits of Using Tax Liens to Find New Investment Properties
Investing in tax lien properties is a great way to invest without having to spend a ton of money. Tax lien investments also help you avoid the responsibility of directly owning a property, which is why they’re popular with new investors.
What are tax liens?
Tax liens occur when someone is unable to pay the taxes on a particular property. Unpaid debt on a property can result in foreclosure if not paid on time. The tax lien itself serves as a claim made by the government to pay for their expenses.
Investors sometimes choose to purchase these tax lien properties for the unpaid debt amount. After purchasing a tax lien property, the property’s original owner will try to pay off their debt within a certain amount of time, which usually ranges from several months to a few years. If they are unable to pay this debt within the allotted time period, then the investor can claim ownership of the property after going through the foreclosure process.
Why liens offer great investment opportunities
One of the best things about tax lien investments is that they offer little risk for the investor. Either you’ll be repaid with interest for your initial investment, or will be able to turn the home into an investment opportunity.
It’s important to know that foreclosure isn’t common with tax liens as around 95 percent of people pay off their debt in time. So, if you’re looking to buy property, then tax liens probably aren’t the best way to do it.
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The benefits of investing in a tax lien property
There are several benefits when it comes to investing in tax liens. Even if you are unable to turn your tax lien property purchase into an investment opportunity, you’ll still get to enjoy routine payments from the homeowner.
In contrast to owning property yourself, tax lien investments don’t require you to deal with tenants. You also don’t have to worry about marketing a property to potential renters or buyers.
One of the biggest reasons investors consider tax lien properties is because they don’t have the same expenses as other investment properties. When you purchase your own property, all responsibility for maintenance and expenses falls on you. This could include repairs, electricity, renovations and much more. Of course, if the tax lien property you purchased does foreclose and you claim ownership, then you’ll have to take care of these expenses. By that time, however, you’ll have made money from the homeowner’s interest payments.
You can also avoid the marketing aspect of property ownership, which is something many new investors struggle with. Finding buyers and tenants is one of the most important aspects of making a profit from your investment property. If you’re unable to properly market the property, then you might find yourself with little profit and plenty of new expenses.
Tax lien properties help avoid all these potential issues as they will all be the homeowner’s responsibility for the time being.
How to find a property tax lien
Tax liens on homes are usually purchased through an auction, so do a quick search of property auctions in your area. You could also consult local real estate professionals, contractors and other investors about upcoming tax lien auctions.
It’s usually a good idea to avoid just showing up to an auction on a property you’ve never seen or done little research on. This will help you avoid blindly purchasing a property that will offer too many problems in the long run.
Even though it’s quite rare that a property reaches foreclosure, you should prepare just in case. This means buying the tax lien for a property in a nice area. Having renters or buyers is essential to making a profit from your new property. To entice these buyers and sellers, you’ll want to purchase a property in a good location. Additionally, owners with homes in nice neighbourhoods will usually be more motivated to keep their homes and will make payments on time.
What to do once you’ve found a tax lien property
Do plenty of research on the property. This will help you avoid spending too much at an auction for a property that won’t show much return. Ask around to see how much investors have paid for tax liens in the area. It’s also a good idea to have a real estate professional check out the property. They will help determine whether the property is worth purchasing or should be avoided.
You should also decide how much you’re willing to spend on a property before going to the auction. Figure out how much you can pay for that property while still making a profit, then stick to your numbers.
The tax lien shouldn’t cost more than 4 percent of the property’s total value according to the National Tax Lien Association. To find this amount, you’d simply divide a close estimate of the property’s value by the lien’s cost.
Should I invest in a tax lien property?
While properties purchased with tax lien are easy to handle and assure that you’ll make some money, your returns probably won’t be that large unless the property is foreclosed on. Interest rates on tax liens are usually around 10 to 12 percent, but you could potentially make a lot more money by investing in a property of your own.
It all comes down to your needs and wants with investing. If you are looking to relax and have some extra income while building your real estate portfolio, then tax liens could be the way to go. Speak with a local real estate professional about potential investment opportunities.
Tax Lien Investing Pros And Cons
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