Tax Lien Certificate
What Kinds of Properties Get Liens On Them?
Some people believe that the only properties with tax liens on them must be “war zone” areas of the city where people are too poor or irresponsible to pay their taxes. But the truth is that all kinds of properties get tax liens on them. In fact, you will even find the homes of the rich and famous with liens on them. But usually the reason the taxes were not paid on time is not because the owner can’t afford them. It’s because the bill just never got paid. Perhaps they forgot. Or perhaps an employee of the property owner forgot. But it doesn’t matter. All kinds of properties get tax liens on them. And whatever the reason is that the taxes go unpaid, you can capitalize on the opportunity.
Keep in mind that property taxes are usually paid by the homeowner’s mortgage company. They do this from funds that are escrowed for just this purpose. This protects them from having a tax lien put ahead of their mortgage lien on the homeowner’s property. But often, well-to-do folks have the property paid off, so there is no mortgage on the property. Thus, they are responsible for paying the property taxes themselves.
Do Your Investments Have These Qualities?
So we’ve established that TLCs are unique, as they run contrary to most investments. In fact, no other investment that we are aware of has all of these qualities.
- Growth
- Income
- Safety
- Convenience
- Liquidity
In a few fortunate situations, you will be able to exchange part of the interest income for a substantial growth in capital. In selecting the tax certificates to be purchased, the knowledgeable and successful investor will try to exchange as much interest income as possible for growth of principal—without incurring any additional risk.
Most TLCs offer an interest income at a government-guaranteed rate. Some of the rates may be a modest 6 percent or 7 percent. But most tax liens will pay a guaranteed interest income of 8 percent, 12 percent, 16 percent, 24 percent, or more.
As an investor, safety should always be important to you. Of course, there are no sure things. Investing, in and of itself, involves risk. But the risk of loss with tax lien certificates is extremely small when compared with other investments. Why? Because every TLC is secured by a valuable piece of real estate with the protection of state laws and the guarantee of interest rates by county governments.
Two decades ago, TLCs wouldn’t have offered the quality of convenience. After all, convenience is not traveling from county office to county office in search of the most desirable certificates. But today, you are able to purchase TLCs over the Internet and through other convenient methods. Some investors have found that they can buy many of their certificates by phone and by mail, although the quality and safety of some of the certificates purchased this way can not always be assured. Another convenient way to purchase TLCs is to hire an agent that can be trusted to make quality purchases for you.
You should always purchase TLCs with the goal of holding them to redemption or foreclosure. But life’s events sometimes create surprises for us, and occasionally we find ourselves faced with the need to liquidate our investments. There are many investments like stocks, bonds, and commodities that are readily traded on national exchanges and these can be liquidated and exchanged for cash in a matter of hours.
However, there are many investments like real estate or businesses that cannot be quickly liquidated except at a loss, sometimes a very substantial loss. And these liquidations can often take days, if not weeks.
Because tax lien certificates are debt instruments, they can be readily assigned from one owner to another. Each certificate has a provision on the back for assignment by the current owner that is readily recognized and recorded by the issuing treasurer in the name of the new owner. Although there is no formal exchange for tax certificates, there does exist, however, a secondary market in which knowledgeable investors can provide quick cash to the owner in exchange for the assignment.
Most of your investments will have a few of these attributes. But how many of your investments have ALL of them? In this course, you’ll learn how tax lien certificates work and how you can use them to help you build your portfolio of wealth. In our current low interest rate economy, this high-return investment stands out as a safe way to invest your money.
What Happens if the Property Owner Doesn’t Pay the Taxes?
We mentioned above about how one of two things will happen with a purchased tax lien—the second one being a home run when you receive a property for pennies on the dollar. Here’s what we mean. In most states, if the property owner doesn’t pay the taxes, they forfeit the property to you. And that means you’ve just won the real estate lottery!
According to statistics, 97% of all tax lien certificates pay off in two years. And the other 3% are your ticket to the ultimate American dream: owning a piece of property for just the taxes and a few fees! Imagine purchasing a magnificent home for just a fraction of its value. Whatever you can sell it for is pure profit!
Remember: Tax liens are guaranteed first position property liens issued by the government. This means you either receive great rates of return, or you acquire a property free and clear. This is mandated by law. Usually the property owner redeems when the redemption period is about to expire. But about 2% of the time the owner will not redeem, giving you the opportunity to own free and clear real estate that you can do with as you please. Rent it, sell it, fix it up or live in it. The choice is yours.
Throughout history, more fortunes have been made in real estate than any other wealth center. That’s what makes tax lien certificates so ideal. Because it doesn’t matter whether the real estate market rises or falls, drops or skyrockets—you’ve got an instrument with a guaranteed return, secured by real estate!
Residential Real Estate
What is residential real estate?
Residential real estate consists mainly of properties that people live in. This ranges from a single-family home to a four-unit building that is called a quad-plex. All of these fall in the category of residential. (Any property with more than four units is classified as commercial. Four units or less is residential.)
Why invest in real estate?
Why should you invest in real estate? It’s simple: Real estate investing can be extremely profitable, and is a safe way to boost your net worth. Plus, you can make a lot of money in ANY real estate market: rising, falling, or flat. And unlike other investments, real estate is a finite commodity. As the old saying goes in regard to land: “They aren’t making any more of it.”
What is appreciation?
Real estate appreciation refers to an increase in value of a property. When your property “appreciates” you have greater equity against which to borrow, and you realize a greater profit when you sell. Property values fluctuate for different reasons, but the economy is the driving factor behind real estate appreciation in the U.S.
How do you depreciate real estate?
Depreciation is an expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. The beauty of real estate is that while the IRS allows you to depreciate it on your taxes, it is actually appreciating.
Investment properties can be depreciated over a number of years, which means that each year you can offset your income by a percentage of the value of the property. After 27.5 years you will no longer be able to depreciate the property (39 years for commercial property), but in the meantime you’ve sheltered significant amounts of income from taxes.
What is an example of leverage?
Most Chinese investors like to pay cash for their real estate. But one unique feature of real estate investing is that you can buy properties using little (or even none) of your own money. This is accomplished through the use of a financing concept often referred to as leveraging.
Leveraging is a simple concept to understand: If you buy a $100,000 house and only put $5,000 down, with the balance of $95,000 financed on a 20-year mortgage, your $5,000 has allowed you to control and invest in a $100,000 property. That’s leverage. Do you now own the $100,000 property free and clear? Of course not—but you do control it, and you can take advantage of it.
Let’s say you rent the property to other people for 20 years and pay off your mortgage. While you will have had expenses along the way (upkeep, maintenance, occasional repairs), hopefully your rental income has at least matched your expenses. In effect, your tenants have paid your mortgage and expenses. We’ll stay conservative and say the property rose in value by 20 percent, a figure that historically is well-below average appreciation rates. So now you own a $120,000 property, and you only spent $5,000 of your own money. Each month it continues to bring in income for you, unless you decide to sell it.
If you do sell, your profit is $20,000 on your initial cash investment of $5,000. Rather than requiring a full cash investment of $100,000 for the initial purchase of the property, you controlled the property and all the profits with just $5,000. That’s the power of leverage.
Commercial Real Estate
What is commercial real estate?
Commercial real estate is property owned to produce income. This means the local government has specifically designated it for business use. Examples of commercial property include strip malls, shopping centers, restaurants, office buildings, warehouses, and apartment buildings. (Although an apartment building is residential by nature, it’s still considered to be commercial property if it has more than four units.)
Why invest in real estate?
Why should you invest in real estate? It’s simple: Real estate investing can be extremely profitable, and is a safe way to boost your net worth. Plus, you can make a lot of money in ANY real estate market: rising, falling, or flat. And unlike other investments, real estate is a finite commodity. As the old saying goes in regard to land: “They aren’t making any more of it.”
What is appreciation?
Real estate appreciation refers to an increase in value of a property. When your property “appreciates” you have greater equity against which to borrow, and you realize a greater profit when you sell. Property values fluctuate for different reasons, but the economy is the driving factor behind real estate appreciation in the U.S.
How do you depreciate real estate?
Depreciation is an expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. The beauty of real estate is that while the IRS allows you to depreciate it on your taxes, it is actually appreciating.
Investment properties can be depreciated over a number of years, which means that each year you can offset your income by a percentage of the value of the property. After 27.5 years you will no longer be able to depreciate the property (39 years for commercial property), but in the meantime you’ve sheltered significant amounts of income from taxes.
What is an example of leverage?
Most Chinese investors like to pay cash for their real estate. But one unique feature of real estate investing is that you can buy properties using little (or even none) of your own money. This is accomplished through the use of a financing concept often referred to as leveraging.
Leveraging is a simple concept to understand: If you buy a $100,000 house and only put $5,000 down, with the balance of $95,000 financed on a 20-year mortgage, your $5,000 has allowed you to control and invest in a $100,000 property. That’s leverage. Do you now own the $100,000 property free and clear? Of course not—but you do control it, and you can take advantage of it.
Let’s say you rent the property to other people for 20 years and pay off your mortgage. While you will have had expenses along the way (upkeep, maintenance, occasional repairs), hopefully your rental income has at least matched your expenses. In effect, your tenants have paid your mortgage and expenses. We’ll stay conservative and say the property rose in value by 20 percent, a figure that historically is well-below average appreciation rates. So now you own a $120,000 property, and you only spent $5,000 of your own money. Each month it continues to bring in income for you, unless you decide to sell it.
If you do sell, your profit is $20,000 on your initial cash investment of $5,000. Rather than requiring a full cash investment of $100,000 for the initial purchase of the property, you controlled the property and all the profits with just $5,000. That’s the power of leverage.
What is a triple net (NNN) lease?
A triple net lease is when a commercial tenant pays for the property taxes, property insurance, property maintenance, and utilities on your building. This creates great income for you as a commercial real estate investor, because the property earns you income, but creates few expenses.
What is a rent escalation?
This is when a commercial real estate lease has a written annual increase in it. The typical rent escalation is 3% annually.
Let’s say you have a commercial office building you are renting for $150,000 a year with a 3% escalation per year. What is a 3% increase of $150,000 for the next year? That’s a $4,500 increase—so for the second year, the lease will be $154,500. And you have not done anything; you’re just the owner!
