Editor’s Note: Longtime Daily readers know one of PBRG’s most important missions is to provide safe “income in an incomeless world.” In September’s issue of The Palm Beach Letter, we hit absolute pay dirt…
It’s a safe (collateralized), off-Wall Street, little-known investment vehicle that not 1 in 100 investors understands: tax liens (and tax deeds).
So today, we sit down with PBRG’s chief tax lien/deed expert, Sean MacIntyre, to gather further insight on this rare “income oasis”…
J. Reeves, editor, The Palm Beach Daily: Sean, what is the difference between tax lien and tax deed investing? Whom is each best suited for?
Sean MacIntyre, research analyst, The Palm Beach Letter: When real property taxes go unpaid, U.S. counties will do one (or both) of the following:
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Either publicly auction the title to the property outright for the cost of the back taxes (tax deeds)
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Or sell the back-tax debt (instead of the properties) to investors like a bond (tax liens).
With tax deeds, investors can buy tax-defaulted properties for pennies on the dollar.
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With tax liens, investors can get market-beating returns guaranteed by state law… collateral in the form of the underlying property… and a higher “win rate” than the stock market.
The returns on liens vary by county and state. For example, Arizona pays tax lien investors up to 16%… Florida pays up to 18%… and Illinois pays up to 18% every six months, and so on.
With tax deeds, I’ve seen million-plus-dollar homes go up for sale starting at $8,000. I attended an auction where a woman in a retirement community bought the $65,000 condo she lived in for $20,600—because her landlord didn’t pay the property taxes. And I met a woman who has over 20 rental properties in Florida and Tennessee that she bought “on the courthouse steps”—that is, at tax deed auctions.
With tax liens, I’ve seen people consistently earn safe, double-digit yields. Mark Ford himself earned 24% per year when he and his partners were investing in tax liens.
J.R.: How much money does someone need to get started here?
Sean: You can get good liens for less than $1,000. I split the cost of my first tax lien certificate with PBRG research analyst Greg Wilson. It cost $504 total.
(There are even tax liens you can buy for $30… but that doesn’t mean they’re any good. After all, it’s hard for counties to collect property taxes on drainage ditches and plots with power poles.)
Most good liens will sell above the $1,000 mark. Large homes and expensive properties can have liens costing north of $40,000. Just make sure you don’t spend more than the property is worth!
To make tax lien investing worthwhile, it’s good to go in to auctions with at least $5,000 to $10,000.
I found a retired woman who bought a two-bedroom home at a tax deed auction for $10,000. She didn’t have much to invest, and she actually bought it through her IRA. Now, she’s renting it and earning income every month.
J.R.: Okay, so what if someone doesn’t have that kind of capital? Are they locked out of this strategy?
Sean: Absolutely not!
It’s all about research. You want to find cheap liens that have a high likelihood of “redeeming” (meaning the property owner pays off the tax lien with interest and penalties to the investor).
So for example, you can find tax liens on small vacant plots slated for future development. Or liens on mobile home lots. These properties appraise for less, so the tax bill is smaller… which means the tax lien is cheaper.
But mortgage companies and developers still want those properties, so they’ll likely redeem that lien (i.e., by paying you as the lien holder) at some point.
The same goes for tax deeds—due diligence is vital. But in addition to research, the key here is patience. Remember that woman who bought a rental property for $10,000? It took her three auctions before she found the right deal.
Plus, keep in mind that real estate is a team sport. There are many opportunities for partnering and financing if you know where to look.
J.R.: You mentioned you’re trying to buy your own home this way. What is your strategy, and would you recommend it for someone who wants to purchase a residence (instead of an investment property)?
Sean: I would absolutely recommend buying a first home this way. It helps to be less picky about location but meticulous in the title searching.
As silly as it sounds, I’m actually looking into getting a home in Pennsylvania this way with a bunch of friends to turn it into a communal writing retreat.
Pennsylvania is a tax deed state, so we can pick up a property directly and fix it up.
So far, it’s coming down to waiting for the right deal and accruing the cash. You can’t get a mortgage before you buy a tax deed. You have to pay the whole cost you bid with a cashier’s check.
J.R.: Sean, in your research reports, you mention a certain subset of the tax lien market called “over-the-counter” (OTC) tax liens. Can you explain what these are?
Sean: When a tax lien certificate doesn’t sell at auction—or the bidder doesn’t actually pay for the lien—it will often revert to the county. Some counties will then compile these liens into huge lists and sell them to investors directly. No need to attend the auction.
(There are over-the-counter tax deeds as well, but that’s a whole other animal.)
While tax lien sales happen once a year, you can buy over-the-counter liens year-round.
Greg and I bought an over-the-counter lien… and it’s earning 18% interest. Here’s a picture of the certificate [address blacked out]:
I found this lien by calling the county tax collector’s office and asking for the list of liens left over from the tax sale.
All told, it took me two hours to narrow down the list… do due diligence on the property online to make sure it was a good investment… and mail a cashier’s check to the county.
Within a week, my lien was recorded, and I had the receipt above in my email.
I have 5% of my investment portfolio in tax liens now. All without ever buying at an auction.
J.R.: Wow. This is game-changing information for thousands of our subscribers, Sean. Thanks so much for talking with us today.
Sean: You’re welcome.