Tax lien investing can be lucrative. They also carry with them risk. Do your due diligence, and with tax liens, you can find the sort of ‘high-yield, low-risk investment you’re after.
That said, investors should always carefully consider the pros and cons of tax lien investing and maintain the knowledge that no investment is a sure thing. Here are the benefits and risks of investing in a tax lien.
Pro: Tax Liens and Their Risks Are Easy to Understand
Some investment products are complex and can suddenly become risky, seemingly out of nowhere. Tax sales Ontario is simple to invest in. When someone has not paid their property taxes, after an extended period of non-payment, the municipality places a tax lien on the property in question and sells it at auction or through public tender. You pay the property taxes owing and receive the property in return.
Con: There Are Limits To The Research You Can Do
In tax lien investing, you buy a property with very limited information. You can’t take a tour of it. You may have some idea of it from photos of the outside, but you don’t know what’s inside or what state it’s in.
However, you can do title searches and research the neighbourhood and the potential to profit from a sale with what you’re buying. Despite your best efforts, you won’t know what’s on the inside until it’s in your possession.
Pro: There’s a Reason It Has High-Yield Potential
Tax lien investing is a high-yield investment. You earn interest on the delinquent taxes paid, assuming you eventually recoup those taxes from the prior homeowner.
The prior homeowner is provided an amount of time to pay by law. If they do not pay in full, the property becomes yours, and, at that time, you can foreclose and decide what to do with the home to maximize your return.
Con: Tax Lien Investing Is Not a Liquid Investment
Unlike other types of investing, you do not have immediate access to the money you’ve put into a tax lien. The investment sits there untouchable. You must wait for it to be repaid or to arrive at the point where foreclosure is possible.
Therefore, tax lien investing is really for the investor who doesn’t mind the wait to collect, is looking for a long-term investment opportunity, and for someone who won’t need to recoup their investment in a rush.
Pro: Tax Liens Are a Passive Investment
After you’ve invested in a tax lien, you don’t need to monitor it or make further moves on the investment. It’s all passive. It accumulates interest, and the clock is ticking until you assume ownership. There is no active property management until that time.
All you’re doing as an investor is collecting the interest payments. Most of the time, the taxes are repaid in full, and the ownership reverts to the prior owner. If it doesn’t, though, you’re set to own it. Win-win!
Con: You Do Not Benefit from Appreciation
You are investing in a tax lien. You do not have an ownership stake in the property itself. You assume ownership at a later date, if at all. In most cases, it won’t reach that point.
This means if a property increases in value, as an investor, you don’t benefit from that appreciation until you have full ownership. Therefore, the return you can earn is limited to the interest on payments.
Pro: You Get A Home at a Fraction of the Cost
You can buy a home at a fraction of the cost through tax lien investing. In the past, people have done it with as little as hundreds of dollars. Today, you’re not likely to see that but imagine owning a piece of property or parcel of land for half or a third of what you would pay for it if you purchased it outright with a mortgage. The only caveat is when you make an offer and need the money accessible and ready to hand over that day.
Con: You Can Lose Money on Tax Lien Investing
If the property owner cannot repay their taxes and you gain ownership of the property, and perhaps there are major issues inside – i.e. electrical, plumbing, structural damage, etc. – you can lose money.
A home like that may be so costly to repair that it’s worthless. This is why your due diligence and research skills are so important. Not every tax lien is a winner. Some certainly aren’t. Look at everything from what you can find out about the property to the region it’s in.
Pro: You Don’t Have to Worry About Prior Mortgages
A tax lien investment comes before any mortgage or non-Crown lien on the property. This means you should obtain ownership of the property and not worry about demands on the property for money or a prior mortgage interfering.
Your investment comes first. There is not very much complication to tax lien investing. If you buy a property with a mortgage, that’s not your problem, and you don’t need to worry.