Buying Real Estate for Pennies on the Dollar

Those who have plenty of capital can easily invest in residential, commercial, and other property such as land or vacation rentals.

Unfortunately, not all of us fit into that category.

So what's the best way to invest in real estate with limited cash? 

If your account isn’t flush with adequate funding for large acquisitions, have no fear. There is an option you can take advantage of with limited funds ... tax lien investments.

All types of investors, not just beginners, use tax liens to help add diversity to their portfolios.

Even when the stock market is at peak performance, diversity in your portfolio is critical to a healthy balance. Alternative assets like tax lien investments are an easy way to diversify and help protect your hard-earned retirement savings when the stock market isn’t so bullish.

The process is not hard! With a little knowledge and research, you can start investing with limited funds that can produce tax-sheltered returns in your account. 

Tax-sheltered? 

Yes, that's right! One extra way to boost your funding for a real estate investment is using your IRA or 401(k) to fund the investment. If you do not personally have the cash to make the investment, you can partner with your IRA to get the deal done. That's huge!

How to purchase a tax lien

Property tax bills are due by property owners every year. When these bills are not paid, the governing municipality sells the unpaid property tax bill through an auction process. 

Depending on the auctioning state’s process and rules:

• The winner is the one who offers the most cash to take ownership of the lien and arranges repayment with the homeowner to set a new interest rate and terms of repayment, or
• The lien is awarded the to the investor willing to accept the lowest interest rate over the term of the lien. Here, the interest rates are attached to the tax bill and continue to build up over the term of the lien (typically 24 months). The municipality continues the billing and collection process here on the investor’s behalf.

In either scenario, you and/or your IRA then becomes the lienholder.

Making money with a tax lien investment

Income is earned in two ways:

• On the interest accrued until the lien is paid in full, or
• In case of default, you or your IRA takes ownership of the property and you can sell it to recoup the investment on the lien and earns additional income gained upon the sale of the property.

It's a win-win-win

One of the great "feel good" aspects with tax liens is that everyone benefits from them.

• You have the opportunity to build tax-free or tax-deferred income for retirement, and to grow more capital in your account to reinvest.
• The homeowner is given a longer grace period to pay the bill.
• The city/state is able to conduct business and serve citizens without interruption due to lack of funds.

Due diligence

While many investors consider tax lien investments a relatively low risk, you should still perform due diligence.

If the homeowner does default, you don’t want to be stuck with a piece of unsellable property. Depending on the condition of the property, you run the risk of having to pour more income into it to make an attractive and profitable sale. Often, in the case of tax lien auctions, you may not be able to visit the property or even perform a survey.

If you are using your IRA for the investment, understand that any and all expenses incurred by your investment (such as repairs or renovations) must be paid out of your IRA funds. If you have a small IRA, this could be a killer. But, if you budget your investment process with this in mind and scope out the property and its potential before investing, you’ll be prepared and still come out a winner!