Is Tax Lien and Deed Investing Free?

I often see infomercials out there that claim to allow people to invest in tax liens or tax deeds without using their own money or having any effects on their personal credit.  Although both are possible, the truth of the matter is that investing does require something to invest, so you will need some money.

There are a lot of options for getting started.  If you have a personal savings account or assets that are readily liquid, then you are good to go.  If not, you may want to consider a variety of options such as taking out a home equity loan, partnering up with a friend or family member, open a credit line, using your 401k money, credit cards, or any other option you can think that will generate some cash for you.

What you have to keep in mind through all of this is that you are getting into investing to make money, so you want to use discretionary income that won't harm you or your family in the short term.  Also, keep in mind that some of the aforementioned options might lead to penalties or high interest rates that could defeat the purposes of either investing in tax liens or tax deeds.

The short story is that, just like the old adage, "Nothing in life is free."  However, tax lien and deed investing can be a way to generate some positive cashflow or some nice interest rates for you, but you have to be smart from the beginning.  If you don't have the money or can't get it, work hard to save some, and then you will be in the position to begin.

The Tax Lien and Tax Deed Process

When it comes to tax liens and tax deeds, a lot of people never bother to deal with them because they do not understand how the processes work with each of them.  Previously, I defined the differences between a tax deed and a tax lien, and so now I will delve a bit into the process, but in a very simple way.

As I mentioned previously, people or businesses must pay annual county taxes on their real estate.  If you own property, you're pretty much guaranteed to owe some taxes on it, and local governments use this money to support their infrastructures.

Now, when people don't pay these taxes, the government still needs that money to maintain its infrastructure, and do normal governmental things like pave roads, pay teachers, and all of that good stuff.  So when it doesn't get that money, it basically auctions off the tax debt to someone.  The government gets its money, and the person who buys the "debt" get the principal, plus some level of interest.  The interest is usually where most people compete in tax lien auctions.

After a designated time period, which varies state to state, the purchaser of the tax lien is then able to file for a tax deed, which in essence forces the property that the taxes weren't paid on, to be auctioned off by the government.  It is at that point that many people come in and try to buy the property for pennies on the dollar, and if you are lucky, you can get a great deal!

Now see, that doesn't sound so bad at all does it?  Of course, it is a bit more complicated than this, but you now have the nuts and bolts of how it works.

Tax Liens Versus Tax Deeds

One of the first questions that I had when learning about tax liens was how they were different than tax deeds.  It seemed like everything I read in a book, online, or in a newspaper mentioned both of these terms, but few of them seemed to explain what the differences were between the two terms.

Therefore, I thought that it would be nice to contrast the two.  A tax lien is basically defined as either 1) A claim imposed by the federal government to liquidate a person's property so that the owed taxes and other fees can be paid in full, or 2) a type of lien placed on a property title when the owner has not paid property, assessment, or other state and federal taxes.  A tax deed on the other hand, is defined as a "deed on a property issued to the purchaser where the property is sold at a public sale for nonpayment of real estate taxes."

Both tax liens and tax deeds can be valuable as a part of a real estate investment portfolio or strategy, and as time moves on we will discuss the differences, advantages, and disadvantages that each has to offer the savvy investor.