Tax lien investing is becoming increasingly popular as a way to generate passive income and build wealth. However, investing can also be risky if you don’t understand the potential risks involved.

Let's discuss five common risks that tax lien investors should be aware of before making an investment. Understanding these risks can help ensure your tax lien investments are successful and profitable.

Overview of Tax Lien Investing

A tax lien is an amount of money owed to the government by individuals or businesses that have not paid their taxes. When you buy a tax lien, you are essentially lending the government money and earning interest on it until the debt has been repaid. Tax lien investing involves buying them from an investment company and using the value of that lien to get returns.

Finding a reputable tax lien investment company and understanding what types of investments they offer is key to getting started. After determining which type of investment is suitable for you, you will need to fill out an application and provide personal information. Before approving the purchase, they need to verify your identity and assess any risks associated with the transaction. Depending on state laws, you can then purchase tax liens at auction or through private sales.

Tax lien investing has many benefits. For starters, most tax liens are secured by real estate, so investors have extra protection if the debtor fails to pay. With interest rates ranging from 8%-24%, tax liens can offer higher returns than many traditional investments. Moreover, since tax liens are backed by local governments, they often take precedence over other sources of debt that may be owed by the property owner, ensuring that investors will be repaid first. Finally, as most purchasers simply buy tax liens at auction, tax lien investing requires minimal research or even special knowledge compared to other forms of investing.

Common Risks Associated with Tax Lien Investing

Tax lien investing can be a great way to generate income, but it also involves risks that should not be overlooked. Some of these risks include:

The Property Might Not Sell for Full Value

You could lose money if the property is worth less than you paid. To cover these losses, you will have to repay all or part of what was invested if the property is worth less than what you owe on it and/or less than your lien plus selling costs.

The Market Might Not Improve

Due to a lack of demand, it may be difficult to sell your tax lien. You may lose money in the process and have to wait until investors show interest before you can sell.

Problems from Foreclosure

Foreclosure comes with issues for tax lien investors. Say you’ve begun working on the foreclosure procedure but it’s taking a long time, as they often do. In that time, if the property is fully paid off, the local government may extinguish the lien before it expires and pays out. In that case, you may be able to recover your initial investment, but not the accumulated interest.

The Bank May Take An Interest In The Property

If the bank is taking an interest in the property, this can be a problem if you want to sell the property. It may be possible for the bank to take back their loan and then sell it on your behalf for more than what you paid for it.

There Is No Guarantee In Recovering Your Money

It’s possible that some or all of your investment could be lost if the property does not sell for full value, or if the borrower does not pay off their tax lien within the specified time frame.

With tax liens, you can’t assume you will get all your money back. It’s important to do your research and work with a reputable company to make sure you’re getting the best return on your investment.

Invest in Tax Liens Today

Discover the potential of tax lien investments with the Tax Sales Master, Ken Letourneau. Ken is dedicated to providing a comprehensive tax lien investment education that includes guidance on how to invest with tax liens.

Learn what a tax lien investment is and how it can benefit your portfolio. Don’t miss out on the opportunity to earn high returns with minimal risk.