{ How to Make Tax Liens Work, pg. 88 }
economists refer to as “economies of
scale.” Basically, this means that costs
of being in business are spread out over
a larger number of assets, bringing down
your cost per asset acquired.
Remember, it takes both time and
money to perform due diligence on tax
liens, so every time competition takes
away opportunities from you, your time
and money goes right out the window.
To be successful in tax liens, an
investor has to come from a position of
strength. Entering the tax lien marketplace
in hopes of buying a handful of liens is a
tough proposition these days.
DIVERSIFICATION
Coming from a position of strength will
likely lead to diversification by itself.
Bringing more muscle (capital) means
more purchasing power. More purchasing
power leads to having a larger portfolio of
Tax Liens. A larger portfolio of tax liens
means greater asset diversification.
Although tax liens as a whole are an
exceptionally safe asset class, there are
still risks involved. If your portfolio is
small and you accidentally purchase a lien
that is secured by an uninhabitable piece
of real estate, the negative effect of that
lien on your portfolio is magnified.
An investor who owns 10 liens and
has 1 turn out to be a stinker is in a much
different position than an investor with
1000 liens that has a similar stinker.
Diversification makes the occasional
mistake or unfortunate hazard far less
important in the grand scheme of Tax Lien
Investing.
LEVERAGE
Leverage is another concept that any
active real estate investor is likely to
understand already. Leveraging your
investments leads to exponential growth in
your returns.
The tax lien industry is a competitive
environment that can leave investors
searching for yields that are high enough
to wet their appetites. It’s also very much
a “hands-on” industry that can make it
very difficult for small investors to spend
Realty411Guide.com
need to consult contractors
or real estate agents to
evaluate the collateral
and determine whether a
condition might exist that
may make the real estate
undesirable. These teams
of people are one of the
greatest resources that any
Tax Lien Investor can have.
NATIONAL PRESENCE
the time and money to participate without
throwing all of their potential profits at
due diligence costs.
Leveraging a portfolio of tax liens
can not only increase your returns
dramatically, but it can also give you
far more purchasing power. What’s best
about leveraging a portfolio of tax liens
is that while it gives you tremendous
upside, it doesn’t create the same potential
downside as when you leverage a piece of
real estate. When you leverage a piece of
real estate your equity can disappear fairly
quickly with a market correction. With
tax liens, which are on average less than
5% of the underlying property’s assessed
value, downward market shifts have no
real effect.
BOOTS ON THE GROUND
Everybody knows the saying – “You
make your money when you buy, not
when you sell.” The same is true of Tax
Liens. You make money with Tax Liens by
buying smart and being able to redeploy
your capital as soon as it comes back to
you.
However, it’s also necessary to have the
right people in place to service a lien and
keep an eye on the underlying collateral
throughout the life of the lien. Far too
often investors buy tax liens assuming that
they’ll never have to worry about them
ever again and that a check will eventually
show up in the mail.
Unfortunately that’s just not always the
case. Should a property owner not pay
and a tax certificate remains unredeemed
it may be necessary to hire legal counsel
to file foreclosure (or an application for
deed) to enforce payment. You may also
PAGE 95 • 2014
There are some successful
Tax Lien Investors that have
made a business out of purchasing Tax
Liens in one specific state. However, this
isn’t the norm. Most successful Tax Lien
Investors cover a majority of the country
with their buying. The reason for doing
this is simple: they have to keep their
capital deployed. If an investor purchases
a lien that pays (redeems) a day later, the
interest tied to the lien may be small and
the return to the investor will likely be
minimal.
The key is to have another outlet to
get that returned capital working again.
It’s not likely that a lien can be purchased
from the same state that the original lien
was purchased in because tax lien auctions
are seasonal. Almost all states sell their
liens within a month or two during the
year and it’s likely that the state’s auctions
would already be over. Being ready to
move from state to state in order to keep a
tax lien portfolio working is a key part of
successfully investing in tax liens.
These are just some of the most
important components of a successful
tax lien investing business. As you can
probably tell, there are certain advantages
that bigger buyers will always have over
smaller buyers. The concept of investing
in tax liens is a simple one, but actually
doing it can be quite a complicated
process. Tax Liens are a fantastic asset
class for the conservative investor, but
like anything else, you have to know what
you’re getting into.
If you don’t, there’s somebody else out
there that does. As they say, “if you can’t
beat ‘em – join ‘em.”
v
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