It’s always a big question, would you be better off investing in tax lien certificates or tax deeds? That’s the question many of my students ask. I can’t make the decision for you – but I can give you a list of the pros and cons of each to make the choice easier.
The Difference Between Liens and Deeds
To refresh your memory, tax lien certificates are issued by half the states; tax deeds are issued by other half.
You can earn 16%, 18%, 24% or even 36% interest with a tax lien certificate. Tax lien certificates earn the investor the fixed amount of interest. If your investment dollars don’t get paid back, you get the property itself.
At tax deed auctions, you are bidding on the actual real estate. If you are the winning bidder, you will get the deed to the property – usually without a mortgage attached because the county has already foreclosed.
Some states offer a redemption period, during which the owner has a chance to pay the taxes due and keep the property.
Florida is a state that issues both tax lien certificates at 18 percent and tax deeds.
The pros of tax deed investments:
- Big profit potential in a short amount of time.
- This is a great real estate investment vehicle for beginners because there are no mortgage loans involved.
- Simple closing process.
- Immediate ownership.
- Large, quick returns on your money.
- Ability to borrow against the property (use it as collateral) since you own it.
- Another way to profit from a tax deed investment is by renting out the property.
The cons of tax deed investments:
- Tax deeds require more investment capital because you are actually getting the real estate and you must pay all the back delinquent taxes.
- In order to recoup your investment, you need to take action quickly and sell the property right away.
- Mistakes can be quite costly. Pay attention to parcel numbers, one number mistake will mean you buy the wrong property – and it could be of little value.
- You must pay for the property on the day of the sale. Most states require that you have cash or a cashier’s check available within an hour after the auction ends.
- You might get auction fever and bid higher than the resale value of the real estate.
- The owner may take advantage of the redemption period and get their property back, leaving you with a smaller profit than you’d anticipated.
Tax Lien Certificates
The pros of tax lien certificate investing:
- Liens provide reliable, high interest returns.
- There is a much smaller initial investment required.
- Large backend potential with high return on investment if you gain the deed to the property.
- You can start tomorrow.
- Simple process; very systematic.
- Guaranteed return of 8 to 36 percent
- Little work involved because you’re not selling property unless the certificate doesn’t redeem. You can buy certificates, stick them in a drawer and forget about them.
There is a specific amount of time that must pass with the taxes unpaid before you obtain deed to the property.
- The longer you have the certificate, the more money it makes.
- This is an almost risk-free investment
- You can choose to invest all your money at one time.
The cons of tax lien certificate investing:
- This is not a liquid investment; you must wait out the redemption period.
- The owner might redeem the certificates right away, giving you little gain on your investment, although some states have penalties that apply no matter the length of time.
- Your investment may turn into ownership but the property is undesirable or not valuable.
- You must start the final notice process in order to get the deed, giving the old owner one more chance to save the property.
The choice between investing in tax lien certificates or tax deeds really comes down to how much capital you have to invest – and how quickly you want to realize a return on that investment.
Ted Thomas is famous for showing newcomers and investors how to earn 6 figure incomes within 1 year of completing his training program. Conservative investors love tax lien certificates because they are predictable, certain and secure and sold by local government. Tax defaulted properties are sold at oral big auctions and online. Starting bid, only the back taxes.