Investing in real estate can be very lucrative. In fact, 90% of millionaires amass their wealth through this channel. But the traditional method of buying and selling property requires a great deal of cash and management. It requires time, resources, and patience. Is there a way to ‘get in the game’ without actually owning property?

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How to Invest in Real Estate Without Buying Property:
Why Would You?

While real estate is an excellent investment, getting started can require a great deal of capital. Especially during these times of accelerated inflation when cash flow is choked off in the pursuit of just the necessities of life. Learning how to invest in real estate without buying property becomes an attractive option.

Owning property comes with its own challenges as well. Properties need maintenance and repair, tenants can be difficult to deal with, and real estate prices can be volatile in our economic climate of bubbles and bursts.

While there are several options available for investing in real estate without owning property, this article will focus on one little-known opportunity: Tax Lien Certificates.

How to Invest in Real Estate Without Buying Property:
What is a Tax Lien Certificate

The origin of tax lien certificates dates back nearly 200 years. The process begins when homeowners fail to pay property taxes. The government requires property tax revenue to sustain essential services such as police, fire, libraries, garbage collection, etc.

With a continued failure to pay, the government steps in and places a lien against the property – essentially preventing the owner from refinancing or selling it until the back taxes are paid.

A tax lien certificate is produced, giving the owner of the certificate the right to collect the taxes – plus a significant amount of interest – with the property itself standing for collateral.

The tax lien certificate is sold at a government auction to the highest bidder, with the bidding price starting at the amount of back taxes owing. The lien does not grant the investor ownership of the property.

The homeowner has a certain amount of time to redeem the certificate by paying the back taxes plus a high interest rate and penalties (the rate of interest is mandated by law and varies in amount from county to county).

When the homeowner pays their taxes, interest, and penalties to the government, the government forwards that money via check to the lienholder. The amount of interest can range anywhere from 12 to 20%. Sometimes, it’s as high as 36%, depending on where the property is located. This is an incredible return on investment (ROI) – and you had none of the hassles associated with owning property.

How to Invest in Real Estate Without Buying Property:
Are Tax Lien Certificates Risk-free?

While the process of tax lien certificate investing is relatively straightforward, and with the investment secured by the property itself, there are some inherent risks associated with this investment that should be considered.

For instance, if the homeowner continues to not pay the taxes, the tax lien certificate holder has the right to foreclose on the property and do with it as they wish (it should be noted that the property’s mortgage will have been wiped off of the property).

While this can prove even more lucrative than if the homeowner had paid the taxes, it defeats the original intention of investing in real estate without buying property.

This brings us to the other risk: worthless property. In rare cases, if ownership of the property is transferred to the investor, the investor may come to realize that the property is worthless. This can happen because of zoning or environmental hazards or for any number of reasons.

What are the chances that you’ll be saddled with property – worthless or otherwise? 97% of the time, homeowners redeem the certificate by paying their taxes and interest. Nevertheless, a tax lien certificate investor will need to do their due diligence prior to bidding on any property. This includes physically seeing the property or having a friend or relative look at it for you.

Zillow or Trulia are also good resources for assessing the property value along with the neighborhood before you start bidding.

If you are interested in learning more about investing in real estate by owning a home, take a look at this article about house hacking.


How to Get Started

If you are interested in learning how to invest in real estate without buying property and want to get started in tax lien certificate investing, what do you need to do?

Your first step is to determine where you want to invest. Not all states issue tax lien certificates – some states are less benevolent and foreclose on properties that fall behind on their taxes, thereby issuing tax deeds instead of lien certificates.

Once you know where you want to invest, you need to educate yourself on where and when the local auctions are held, and most importantly, what the rules of the auction are, as these will vary from state to state and county to county.

Finally, once you know when and where the auction will take place and you understand the rules, you need to research the properties and choose ahead of time which ones make financial sense to bid on. Coming down with ‘bidding fever’ at the auction often ends in poor decisions.

Conclusion

We have talked about tax lien certificates from a very high level, and although it is a relatively easy process, there are nuances and pitfalls to be navigated. Enrolling in a course or hiring a coach/mentor is possibly one of the best decisions you can make.

As a free gift to Acquania’s devoted readers, we would like to gift you a Free Insiders Report designed to get you started on your path to tax-defaulted property investing. For investors looking to break into real estate without having to own property, tax-defaulted property investing is a preferred way of doing just that.

Have you ever considered investing in real estate with your family? To hear my advice, listen to Episode #29 on The Purpose of Money Podcast – based on my personal experience.