Buying Tax Liens: The Facts

Recently someone asked me some questions that I think are on the mind of everyone who is thinking about buying tax liens. People want to know how much money they need to get started in tax lien investing and if this is something that they can use as their main source of income. In this article I will give my experience of what it takes to get started as opposed to how much money you need to invest in order to turn buying tax liens into your main income source.

First let me make it clear that tax lien investing is only one of my income sources. I use it as a way to invest for the future and not for current income. All of the investors that I know personally who buy tax liens do not make a living at tax lien investing. I do know individuals who are independently wealthy and all of their income comes from passive sources - part of that is from tax lien investing. Most of these individuals made a lot of money in other businesses or in real estate and invested their profits in tax liens where it could grow faster.

But you don't need to be wealthy to get started. You can get started with only a few hundred dollars; however you are not going to get rich that way. In order to be able to quit your 9-5 JOB you would have to have hundreds of thousands of dollars invested. Think about it, even if you are averaging 18% on your investment - how much would you need to have invested each year to make enough to live on?

Assuming that one third of your tax lien portfolio will redeem each year, and you had $250,000 invested, you would receive $88,500 the first year. But in order to keep making that money, you would have to reinvest $75,000 and your actual profit would be only $13,500 per year. If you actually wanted to live off your profits from buying tax liens you would have to have $900,000 invested to make only $48,600 per year and reinvest the $270,000 in principal that gets redeemed each year. In order to keep that much invested, tax lien investing would have to be your full time job.

Tax lien investing is big business and you can see why millionaires, bank, and fund companies get involved, but what about the average person? I have a small portfolio of about $50,000 and it took a few years to build up to that. About 30% of that gets redeemed each year, and that’s $16,000 and I make about 18% on that or $2700 a year. I need to re-invest the $16,000 principal each year, which I can do by going to a handful of tax sales. I’m not making a killing, but where else can I put my money away safely and make that much? If I continue to re-invest my profits as well, I can grow my investment so that by the time I'm ready to retire I will have at least $250,000 invested and will be able to take out $13,500 in profit each year. It’s not enough to live on, but I’ll take an extra $13,500 each year along with the other streams of income I’m working on! Of course I'll still have to be actively involved in tax lien investing if I want that money to keep coming.

So here’s my suggestion to those of you who are looking to have tax lien investing replace your job. Keep your job especially if you have benefits and a 401(k). Contribute all you can to your 401(k), especially if you have a company match to a portion of it. Start building your tax lien portfolio now, while your working at your job so that you can retire early take all of the money in your 401k and roll it over into a self-directed IRA where you can use it for investing in real estate and tax liens. That’s my plan.