Tax Lien Investing: Can You Get Double Digit Returns Without Doing Any Work?
By: Tax Lien Lady | Posted: 18th August 2010
Tax lien investing is a great way to save for the future; it’s a very good alternative to investing in mutual funds. With tax liens, you don’t have to worry about the volatility in the market. The stock market or real estate market can go up or down, but your rate of return stays the same. Another advantage to tax lien investing is that you can do it yourself without paying any brokerage fees. But what if you don’t have the time or the inclination to learn how to invest in tax liens profitably? Are there ways that you can invest in tax liens without doing all of the work yourself, and without having to attend the tax sale?
Although buying tax liens online is a way that you can participate in tax sales without going to the sale, you still have to spend the time to do your due diligence. But what if you could give your money to someone else who could do all the work, bid at the tax sale for you, and manage your portfolio? What if you didn’t have to do anything but collect your profit (and pay management fees)? There are actually 2 little known ways that you can do this; one is to invest in a tax lien investing fund and the other is to use a tax lien agent. So how do these two methods of investing work and which is best for you?
First of all when someone else is doing all the work they have to get paid, so there is a tradeoff, it will cost you a little bit of your profit to have someone else do the work for you. How much you pay for this service depends on how much money you invest and whether you invest with a fund or through an agent. A tax lien investing agent will set up an individual account for you and buy tax liens in your name and manage your account for you. The minimum investment for most agents is $20,000 or $30,000 and they take an upfront fee that can be 6-10% of your initial investment plus they charge a regular maintenance fee. One of the agents that I know of charges 5% per year on your actively placed funds, but there average return to investors is over 30% (before fees). If a tax lien or redeemable deed doesn’t redeem and you get to foreclose on the property, you actually get the property, but the agent will take a 25% of your profit on the property.
When you invest in a fund, on the other hand, you are buying shares in the fund not individual liens or deeds. All of the assets are held in the name of the fund and not in your name. There is no upfront set up fee as there is when you invest through an agent. When a lien or deed is acquired by the fund the proceeds are split evenly among shareholders. Because the expenses are shared by all of the shareholders in the fund, fees tend to be lower when investing with a fund then they are with an agent. Fees for a fund that I personally invest in are 3.5% per year and as with the agents the fund manager will also take a bonus of 25% of any profit from properties that are foreclosed on by the fund. These fees are recognized by the entire fund.
So which is the best way for you to invest your money in tax liens if you want someone else to do all of the work for you? I choose to invest in tax lien investing fund to diversify my tax lien portfolio. I like to go to a few tax sales myself, but I don’t want to only invest in one state, nor do I want to use some of my profit to travel to other states just to invest in tax liens or spend a lot of time doing due diligence on properties in areas that I know nothing about. So I invest some money with a tax lien investing fund that invests in states other than the state I do my investing in. I like a fund because they have a lower minimum investment and don’t have to pay a set up fee.
The downside to investing in a fund instead of with a tax lien agent is that the liens or deeds are not owned by me but by the fund, what I own are shares in the fund (which is an LLC), so technically I only own a piece of what is in the fund. I really don’t mind that the liens and deeds aren’t owned by me, since I am using money from my self-directed IRA to invest anyway. Even if I invested through an agent the liens would be in the name of my IRA, and not owned by me personally. The upside is that I pay less money to the fund manager than I would have to pay an agent, and that I don’t need quite as much money to invest.
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Tags: little bit, stock market, how much money, investors, inclination, due diligence, initial investment, rate of return, volatility, real estate market, maintenance fee, tradeoff, minimum investment, upfront fee