Pros and Cons of Tax Lien Investing

Tax lien investing is a type of investment with which many investors are unfamiliar. This type of investment involves purchasing tax liens from a county government through a bidding process. Here are some of the pros and cons associated with tax lien investing.

Pros

One of the big advantages of this type of investment is that you can get a nice rate of return. Most of the time, they have a minimum rate that you will be able to receive once you purchase a tax lien. Typically, you will go through a bidding process with other investors in the auction. The bid will begin at a high interest rate. Bidders will then take turns bidding on the lien at a lower rate of return. The last person to bid will get the tax lien. Most of the time, these rates are much better than what you get from traditional forms of investment.

Another big advantage of this type of investment strategy is that you could potentially end up with a piece of property. When you purchase a tax lien, it is because someone failed to pay the property taxes on a piece of property. If that person does not step up and pay the taxes, the individual that purchased the tax lien is going to be able to foreclose on the property. In 95 percent of the cases, the individual pays the taxes and gets the lien removed. However, in some cases, tax lien investors end up with ownership of a property for a very small investment.

Cons

Even though this type of investment can be advantageous, there are a few drawbacks as well. For one thing, you are going to have to come up with a large payment all at once. When you bid on a tax lien, you may be required to pay for the entire amount immediately or within a few days. For some people, this can be difficult; it requires you to have a large amount of capital to invest.

Another problem with this type of investment is that tax liens are not liquid. When you purchase a tax lien, you are not going to be able to sell it in the secondary market as you could with stocks or bonds. You are going to be holding onto the tax lien until the taxes and the interest on the taxes are paid.

Many investors also think that it is difficult to get involved with this type of market. In order to invest in tax liens, you have to be very proactive and physically go to an auction. This is not the type of investment for which you can open up a brokerage account and simply make a purchase from your computer. Many investors are intimidated by the fact that they have to contact a county government and find out when a tax lien auction is going to take place.

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