If you saw my last tutorial on retiring early and wealthy, you now know how anyone can invest a small amount of money over the course of their life, and by exploiting compound interest, achieve an extremely comfortable and easy going retirement. In Part 2, we are going to dive into something a little more risky: Tax liens.
Tax liens are placed on people, who for whatever reason, cannot pay the taxes they owe to the government, whether it be income, property, etc. When this happens, a "lien" is placed on the person's home, which prevents them from selling their property until the outstanding taxes are paid. If someone is out of money, yet unable to sell their home, this can put the family in an impossible situation, in which they cannot sell their home and are forced to part with their belongings.
Belongings you have accumulated over your life are likely more valuable to your family than the home they are contained in, simply because possesions are likely more sentimental, and often more valuable. Later in this article, you will see why tax liens might not be the best investment choice.
At this point, you probably have no idea why a tax lien on someone else can make money. Well, here's how.
When someone gets a tax lien placed on their home, another party can actually pay the tax lien off for them. When you pay off someone else's lien, they are bound by contract to pay you the money you put towards their lien, plus interest. Quite a healthy bit of interest, I might add. The time they have to pay the interest can vary. The longer they have to pay the lien off to you, the more money you will get.
What Are the Risks?
The largest downfall of investing in a lien is the risk the person indebted to you potentially doesn't pay you back. However, this isn't necessarily a downfall, because upon a person's inability to pay their debt back to you, you can become owner of their property. This means you have a piece of real estate that you need to get rid of fast, before the taxes put a burden on you and require more money than what you put in.
So if you can flip a house quickly for a good price, you can yield a large profit (and someone else gets a good deal on a house).
How Can I Invest in Tax Liens?
Tax liens are often available through auction, online, brokers and even Craigslist. If you can get your hands on one, and are willing to take the risk, it might be the best investment you ever make.
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