Tax Liens and Deeds Series – Part 2
February 14, 2013
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It is the goal at Rich Dad Education that every student that passes through its program is presented with an education that puts him or her in a position to succeed. This is the driving force behind the company, from when a student first enters Rich Dad Education’s Free Workshop all the way through Rich Dad Education’s Elite Training. These articles are designed for existing students to serve as a refresher and for those that may be new to the Rich Dad universe to see a small sample of what we offer students each and every day. This is the second in a series of articles on the topic of tax liens and deeds.
Before we get started exploring this wonderful investment strategy, let’s set some expectations regarding the potential profits you can make. Rich Dad Education offers education through numerous strategies, each of which has its own particular strengths in getting you to where you want to be financially in your life. While there are situations where tax liens and deeds investors hit that proverbial home run (i.e. acquire a $300,000 home for a few thousand), you need to approach tax liens and deeds investing from a more tempered vantage point. Now, even that toned-down vantage point results in an incredible and steady return on investment (ROI) that can eventually lead to your escape from the Rat Race, and escaping the Rat Race is what Rich Dad Education is all about.
Let’s build on our tax liens outline from the first article:
How Tax Liens and Deeds Work – The Super Succinct Version
- Governments tax properties
- If the property owner doesn’t pay by the due date each year, then the government places a lien against the property for the amount of the defaulted payment
- The owner is given time to pay taxes
- If taxes are not paid by a certain date, the government will hold a tax sale and auction off either a tax lien certificate or a tax deed
- You purchase the tax lien or deed
State and local governments do not want to be in the speculation/investing business. They create budgets and count on property taxes as a large part of their revenue. When taxes aren’t paid they don’t care how they collect—as long as they collect—and the selling of tax liens to investors allows them to collect the revenue they have projected to collect.
Why do Potential Investors Care?
Since nobody is going to help the government out just to be nice, governments have to find a way to incentivize investors to buy the rights to the tax lien from the government. Governments do this by setting an interest rate on the tax lien that is guaranteed. Thus the investor who purchases the tax lien sits back and collects a nice interest rate on the tax lien (interest rates vary from state to state, but some states have rates as high as 24%).
The concept should be very appealing to those who have read Cash Flow Quadrant by Robert Kiyosaki or students who are familiar with the Rich Dad philosophy. One of the goals of all Rich Dad students is to reach the point where the passive income from their investments allows them to escape the Rat Race. Income produced in this manner can allow you to truly reach a degree of freedom that so few achieve in life, which is one of the many reasons tax liens and deeds investing is so special.
Once You Own the Tax Lien – The Super Succinct Version
In future segments, the process of purchasing tax liens will be discussed. For now, let’s focus on the conceptual part of what happens once you own the tax lien.
- You purchase the tax lien from the government
- The owner of the property is required to pay the original taxes, interest, penalties, and fees
- If they do not pay in full, the tax lien stays
- If they do not pay in the redemption period (redemption period is the term describing the amount of time the tax payer has to pay their taxes, interest, etc.), then the property will either:
- Become yours (depending on the particular state)
- Be sold at auction (with your tax lien, including interest being paid by the new purchaser of the property)
So effectively one of three things happens once you purchase the tax lien:
- The property becomes yours
- The property is sold at auction and you make the full amount on interest on your investment
- The owner of the property pays off the lien and you receive your original money back, plus interest, and depending on the location sometimes even an extra early redemption penalty
Tax liens and deeds investing is truly a fascinating way to invest. The Rich Dad Education online series will continue in a few days with a deeper look at how to purchase tax liens and deeds.