Make Money Paying Other People’s Taxes

Real estate offers many ways to make money. It can be sold at a profit, rented, or bought through real estate stocks, bonds, or funds.

Further, you can even profit when an owner fails to pay taxes. The municipality will issue a tax lien on the property. You can buy this tax lien and earn money by collecting taxes and interest from the owner.

Many people consider investing in a tax lien. This provides large profits for investors; however, it comes with great risks. It’s best to know more about tax liens and how investing in them works.

Does this side hustle interest you? Read on to learn how to make money paying other people’s taxes.

What Is a Tax Lien?

An owner who fails to pay his/her property taxes will receive a lien from the city or municipality. The authority depends on where the property is located. A lien is a legal claim against a property where taxes are left unpaid. A property with a lien cannot be sold until its unpaid taxes are all paid.

Once a lien is issued to a property, a tax lien will be given to the owner by the municipality. A tax lien indicates the total amount of unpaid taxes plus any interest or penalties due. These tax lien certificates are then auctioned off to the highest bidder. With this, you can purchase a property for as few hundred dollars or more.

How Does Tax Lien Investing Work?

When a property owner has unpaid taxes, the municipality gains the right to foreclose on their property. The municipality can sell tax liens to investors through an auction. The investors can pay the unpaid taxes. Then, the property owner has to pay the investor the taxes with interest dues and other fees.

The amount of interest depends on the jurisdiction where the property is located. Tax liens are used because municipalities receive the cash right away. This also helps the property owners, as it buys them more time to pay.

The auction will be a competition among investors who will accept the lowest interest rate or bid the highest premium for the tax lien. Investors look up to higher profits of buying tax liens.

There are two ways of conducting bidding:

1. Bidding down the interest rate – the investor who bids the lowest interest rate wins.
2. Bidding a premium on the lien – the investor who bids the highest premium above the lien wins. The premium gains interest. But they are rarely paid back.

The Responsibilities

Investing in tax liens may seem simple and lucrative. However, you also have responsibilities to fulfill. The obligations on liens depend on the location where the property is located.

It may be fun to purchase properties at their lowest rates, but tax liens do have expiration dates. Just like other things, they expire. Once the tax lien expires, your right to claim and collect the unpaid taxes with interests and dues is also over. This might result in a loss of money.

If you plan to keep the property, you must also pay the taxes for the following year. Otherwise, other people may buy the lien.

If you’re planning to buy a tax lien certificate, you must research the rules on your location. The notification for the property owner depends on every location. Some areas require the investor to notify the property owner about their purchase. Similarly, they are also required to notify them about the expiration date.

Benefits of Investing in Tax Liens

You don’t have to be knowledgeable in real estate like an agent or an investor to invest in tax liens. Everyone can bid during the auction as long as you’re willing to pay. However, you must be also aware of the risks you’re taking.

Diversification

Putting your investments on tax liens will diversify your portfolio. Tax liens offer an average of 3% to 7% interest rates. Further, you may find above-market interest rates.

Payoff

Rarely, you don’t get your money back. Most of the time the property owners pay up before the expiration of the liens. Property owners do not like to foreclose their properties.

Potential

You can purchase a property much much less of its actual cost. This happens when a tax lien foreclosed.

If you’re thinking about whether investing in tax liens is the best, you should try it out first. Then assess whether you gain or you lost money in actually doing it. A huge amount of profits can are expected here if you know what you’re doing. Finally, this can be a source of your passive income. Invest wisely!