How to Invest In Tax Liens

Tax liens investing is a unique way to make money from real estate, as it doesn’t involve purchasing property but the outstanding taxes racked up against it. While this can be lucrative, providing around 20-40% rate of return in a short period, it’s also complicated.

If you’re considering getting involved in tax lien investing, the consultative advice in this article should give you an idea of where to start. Before getting involved in tax liens, it’s important to discuss your plans with a tax adviser, accountant or lawyer for advice on your plans. Financial advisors can also provide useful advice.

Let’s start simple: what is a tax lien?

A tax lien is a legal claim placed on a property when the owner fails to pay their property taxes. In the United States, local governments sell these liens through public auctions to recover the unpaid taxes.

Investors can purchase the unpaid balance, paying the back taxes owed on behalf of the property owner. Buying a tax lien doesn’t mean that you own the property. Instead, you earn the right to collect the debt—plus interest—when the property owner repays the amount.

Most tax lien investors don’t seize ownership of the property. This is usually a last resort if the property owner fails to make their repayments to you on their debt. You profit by charging interest on the debt you’ve paid off.

Mutual benefits of tax lien investment

Tax liens are a specialized investment strategy that can offer lucrative returns, but they require careful research and a clear understanding of the process. In a conversation with us, Fuquan Bilal of NNG Capital describes tax liens as a unique way to get real estate at a discount – and create community impact.

He explains that:

“(Tax liens) are a different investment strategy approach we use to get real estate at a discount. It’s also a way for us to revitalize the community, helping the township get their properties back on the tax roll so they can generate income. Then you can renovate it, and provide a better place to live for the residents that usually don’t get that type of quality of apartments. It’s an impact project all the way around, and is profitable as well.”

In essence, tax lien investing isn’t just about earning high returns—it’s also an opportunity to support community development and improve neglected properties.

Why invest in tax liens?

The main appeal of buying property tax liens is the potential for high returns. Some states offer annualized interest rates ranging from 10% to 18% or more. If the owner doesn’t pay within a set redemption period, investors may even have the option to make a direct purchase and buy the property itself for a fraction of its market value.

Being a tax lien holder isn’t without risk. Misjudging a property’s value, or misunderstanding state-specific regulations, can lead to significant losses. Tax lien law is complicated, which is why it’s so important to seek professional advice before spending a dollar.

For those looking to diversify their portfolios with a high-yield option backed by real estate, tax lien investing can be a profitable strategy—but only if it’s done correctly.

Seeking advice from lawyers, financial advisors, and tax specialists is crucial

Tax lien investing is complex, and varies significantly depending on state, county, or municipality. Having a solid understanding of the entire process is essential to avoid costly mistakes and maximize your returns. Here’s why understanding the tax lien process is crucial:

1. Avoiding common pitfalls: Lack of knowledge can lead to investing in undesirable or worthless properties.
2. Accurately calculating potential returns: Different states have varying interest rates and redemption periods that directly impact profitability.
3. Understanding the foreclosure process: If the lien is not redeemed, understanding how to proceed with foreclosure is critical to securing your investment.
4. Minimizing legal risks: Knowing state and local laws can prevent legal complications and ensure a smoother investment process.

When we spoke to Fuquan, he told us that that the biggest mistake new property investors can make is rushing into tax lien investing without fully grasping the nuances. This can turn a promising investment into a financial burden.

What is a tax lien certificate?

A tax lien certificate is a document issued to the investor that shows they have purchased a lien on the property.

This certificate entitles the investor to receive the unpaid taxes, plus interest, when the property owner eventually pays the back taxes. If the taxes are not paid within a specific timeframe, the certificate holder may have the option to start foreclosure proceedings.

Understanding delinquent property taxes
Delinquent taxes are those that a property owner has failed to pay within the given period. The local government then places a lien on the property, which can lead to the property being auctioned off to recoup the lost revenue.

How to buy property tax liens

There are typically two types of tax lien auctions that happen in different municipalities or townships:

1. General tax lien sale: This occurs around the end of the year when the township or city puts tax-delinquent properties up for auction. These are public auctions and bidding can often get competitive: especially when large institutional tax lien investors like banks and hedge funds are involved.
2. Special vacant property auctions: In these cases, the government offers special auctions for vacant properties with unpaid taxes. These are less publicized, so can present unique opportunities to buy tax debts at a lower cost.

Some counties list the dates for these auctions on their website. You can also call your county’s tax collection office and ask for information about the process for buying tax liens in your municipality.

Fuquan shared his strategy for finding success at these auctions with us. He recommends researching which municipalities host vacant property auctions and attending these lesser-known events to gain a competitive edge:

“You can check the vacant property list in any township and ask how they dispose of those properties that are delinquent with taxes. Some have special auctions, giving you an opportunity to get a one-off or several properties.”

Key Tip: Always be prepared to pay for the lien immediately upon winning the bid—often by the end of the auction day. If you don’t have the capital to move forward, the lien will be sold to the next highest bidder.

Pros and cons of tax lien investing

Tax lien certificates can serve as a secure, collateral-backed addition to a well-diversified portfolio. However, they’re not a beginner investment. You should only consider this type of investment if you have the time, expertise, and the flexibility to reinvest when short-term liens are redeemed ahead of schedule.

These are some of the pros and cons to consider.

Pros of investing in tax liens

1. High interest rates

Many states offer double-digit returns on tax liens. For example, Florida’s maximum interest rate is 18%, and in Alabama its 12%. Additionally, Iowa charges 2% on the unpaid balance. However, some municipalities use a “bid down” auction. In these cases, investors win the lien based on the lowest interest rate they’d be willing to expect. The lower the interest rate you’d expect, the lower your profits will be.

2. Secured by real estate

Your investment is tied to a tangible asset.

3. Low initial investment

For the most part, individual investors don’t need a lot of money to participate in tax sales. Unpaid property taxes can be bought for as little as a few hundred or few thousand dollars.

4. Potential for property ownership

There’s a small chance you could end up owning the property. If the owner doesn’t pay their outstanding taxes, penalties, and fees, you could start foreclosure proceedings and claim ownership of the property. From here, you can sell the property for a generous return or convert it into an investment property.

5. Positive impact on communities

It’s not all about profit, either. Purchasing property tax debt gives you a chance to make a positive impact on communities: either by bringing unoccupied properties into circulation or by giving homeowners a reprieve and helping to keep them in their homes.

Cons of Investing in Tax Liens

1. It’s complicated

Navigating the various laws and procedures can be challenging. It’s best if you have a lot of experience in real estate investing, as well as a team of lawyers and financial advisors. Converting a tax lien to a real estate investment takes time, resources, and the expertise of an attorney.

2. Long redemption periods

Tax lien redemption is when the property owner reclaims their property by paying off the lien. Redemption periods can last from six months up to three years, after which you have the right to start foreclosure proceedings if the debt (and interest) isn’t paid off.

If your property redeems quicker than you thought, you could end up with lots of capital before you’re ready for a new investment. Or, if it’s slow to redeem, you could end up in financial trouble yourself.

3. Cash flow requirements

Investors need the full amount to pay for the lien immediately. If you don’t stump up the money immediately at auction, the lien will be sold to the next highest bidder.

4. Property risk

The value of the property might not justify the investment. For example, some people stop paying taxes on properties that are impossible to sell, as an easy way to offload them. If you buy and foreclose on a lien like this, you’ll find yourself in the same position. This is why it’s so important to do your research on every property before putting in a bid.

5. Foreclosure proceedings can be expensive

If the owner doesn’t repay their taxes within the redemption period, you can own the property. However, the process of foreclosure itself can be time-consuming and pricey. There’s also the moral aspect. Foreclosing on the property could mean making someone homeless, which can take an emotional toll on you.

How to get started: a simple action plan

1. Step 1: Learn the business—Before spending a dollar, you should immerse yourself in research so that you fully understand what you’re getting into. Read books, join webinars, and speak with professionals about local laws
2. Step 2: Attend auctions—Participate in local or online tax lien auctions just to observe. Watching professionals in action will give you a good idea of which properties are likely to bring attractive returns, and which ones to avoid in future.
3. Step 3: Make your first purchase—Start small and avoid overbidding.
4. Step 4: Manage your portfolio—Tax liens are an active, not passive, investment. Track redemptions and keep detailed records. And have an attorney and tax expert on speed dial for advice when you need it.

Dive deeper into tax lien investing with expert insights

If you’re serious about tax lien investing, check out our conversation with Fuquan Bilal on YouTube. We break down advanced strategies, legal insights, and insider tips from a seasoned investor. Fuquan has been involved in this type of real estate investing since 1999 and offers many real-world examples of how to make a success out of tax lien investing. Are you looking to broaden your investment horizon or be captivated by the lucrative returns of tax lien investments? Express Capital Financing ensures you have the capital and confidence to invest wisely. With our experienced professionals and tailored financing solutions at your disposal, stepping into the world of tax lien investing becomes both secure and straightforward. Contact us today and let us guide you towards unlocking the true potential of tax lien investments.