Home / Latest Blog Posts / November 02, 2019

Pros and Cons to Tax Lien Investing.

Pros and Cons to Tax Lien Investing

Authored by Taner on November 02, 2019

Many real estate investors often get interested in opportunity to buy real estate tax liens from municipalities at auctions that typically take place at the end of the year. These are the liens that are placed on properties if the owner fails to pay their taxes in that year. Instead of waiting for payment, the city auctions off the tax lien to the public at face value that will come with interest payments that will be payable from the property owner when they decide to redeem the lien.

The bidding starts at the highest potential interest rate allowable in NJ (18%), and then investors bid down the interest rate to the lowest acceptable rate of return they will accept for that asset. If the interest rate is bid down to 0%, then investors can even pay a premium over the face value of the tax lien to purchase it. Once purchased, the investor must make all subsequent tax payments for the property, and if they are not redeemed by the property owner with the principal balance as well as any due interested within 2 years then they will have the ability to begin foreclosure and acquire title to the property.

Pros:

  • Safe. If your tax lien certificate is not redeemed within 2 years you can obtain title to the property. Property taxes in NJ are typically between 1.5%-3%. If you pay the face value of the lien plus 2 years worth of property taxes then you are all in for no more than 9% of property value plus legal and acquisition costs.
  • Return. Up to 18.0% per annum return.
  • Management. Very low management required. Need to keep up on subsequent tax payments and begin foreclosure when able. No need to manage property or tenants unless property is foreclosed on.

Cons:

  • Cash flow. Interest payments are not paid during the holding period. It is deferred until redemption period when you received principal payment. You can go many years before receiving cash back.
  • Title. When you foreclose on a property from a tax lien foreclosure it can be difficult for a buyer’s title company to insure title.
  • Site condition. During the tax lien holding period you have absolutely no control over the condition of the property. It can burn down and lose significant value, or it could have substantial environmental problems which an investor may be completely unaware of. Either of these issues could substantially reduce the return or even drive the investor’s return profile into a loss.

Contact us to find out how we can help you.

Buying, Selling, or Investing, PrawdzikProperties is the right company for you.