Everyone aspires to gain liberty, justice, and prosperity in this life, with varying degrees of success. But only a select few ever gain the tax bracket that they desire.
And I am not only talking about income taxes. While many people aspire to own a home, many don’t consider the annual property tax implications.
The average annual property tax rate is about 1.1%. Now while that may not sound like a lot of money, that is the average annual equivalent of $2,375.
And the amount of property tax you pay depends on your state of residence. If you live in New Jersey, the property tax is a whopping 2.47%. If you have an expensive home, you might pay $8,100 annually in property taxes.
So, it’s no wonder that homeowners struggle with property taxes as much as their mortgage payments.
Consider a report by the National Tax Lien Association that shows that over $14 billion in property taxes go unpaid annually.
Now, why do you need to know this information? If you are shrewd about investing, you can now invest and make passive income by investing in tax lien certificates.
Tax Lien Certificates
A tax lien is a legal act of a local or federal government claiming property to satisfy unpaid tax bills.
Since over $14 billion in property taxes are unpaid annually, that means a lot of tax liens get issued. And since local governments hate unpaid tax bills, they mitigate their losses by auctioning tax lien certificates at local auctions.
A tax lien certificate allows you to invest in a stranger’s tax lien for the purposes of gaining interest payments. And the local government offers them gets their tax payment via a third party in this manner as well.
You can buy a tax lien certificate for as little as $100 at a courthouse or online government auction. A tax lien interest rate ranges between 5% to 50%.
After you buy the tax lien certificate against someone’s property, you get an interest payment every time the original homeowner pays their tax bill.
In many states, the annual property tax interest penalty payment is applied after a lien is sold. So, you could get an interest payment even if the lien isn’t paid back at that point.
If the original owner doesn’t pay their taxes for three years, then the tax lien investor can make a legal claim to foreclose and claim the deed. (This can get dicey if there are multiple tax lien investors for the same property)
Diversify and be Cautious
If you opt to invest in tax lien certificates, make sure you invest in a few. That way, you could have a few streams of passive income coming in.
Also, you shouldn’t invest in a tax lien certificate in the hopes of snagging a house for cheap. For one thing, there are usually multiple tax lien certificates auctioned against the same property.
Even if you could buy out other investors and take over a property, beware of what you wish for. The property could be in disarray and need expensive repairs.
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Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.