One of the unique advantages of real estate investing is the tax benefit it offers. This benefit is primarily due to the concept of depreciation.

Depreciation and Taxes

Most people recognize that business expenses are deductible. Labor, cost of goods sold, and equipment purchases are all expenses that reduce a typical business's taxable income. In the case of equipment purchases, they must typically be deducted from income over the expected useful life of the equipment purchased. Depreciation occurs by removing an expense over time. 

For example, a construction company purchases machinery for $80,000 that has an expected life of 10 years. Rather than deducing the full amount, the Internal Revenue Code (IRC) allows the company to write off $8,000 per year for 10 years. It recognizes the depreciation in the value of the machinery.

Similarly, the tax code allows owners of income property to deduct the cost of any equipment they purchase – including the cost of the buildings themselves. But unlike most equipment, which really does wear out and loses value over time, buildings typically grow in value as time passes. Unlike other costs associated with operating a property (i.e. taxes, insurance, maintenance, etc.), which are actual, out-of-pocket expenses for a landlord, depreciation is a deduction that does not reflect a real cost to the owner. In other words, this depreciation deduction essentially allows the owner to treat the property as though it were declining in value. You can do this even as the property steadily increases in value. Let's see how this might work with an actual income property investment.

Deprecation and Real Estate


How Depreciation Works Over Time

Suppose you purchase a 4-plex for $380,000, with a monthly cash flow of $500. When you calculate your tax obligation for the year, determine how much of the building's cost was in the land's value. Buildings could depreciate, but land cannot. Let's say that you allocate $70,000 to the cost of the land. The remaining $310,000 is allocated to the cost of the building.

Residential income property depreciates over 27 ½ years. So, we would divide $310,000 by 27.5. With this formula, we find that we can take a deduction of $11,272.73 each year for depreciation. Remember, we had a positive cash flow of $500 per month after operating expenses and debt service. That is $6,000 per year. However, after the $11,272.73 deduction allowed for depreciation, the entire cash flow of $6,000 would be offset. This means no tax liability incurs. The property would be showing a “paper loss” of $5,272.73 for the year. In other words, the $6,000 you made from your property was tax-free!

Furthermore, you could have a loss to use as an offset to other income you may have earned during the year. Being able to claim that you are losing money, legally, is a benefit to real estate ownership. Understanding depreciation can be as significant as any other consideration.

Requirements for Depreciating Rental Properties

To realize the considerable benefits of depreciating a rental property, ensure that your situation applies. You can depreciate a rental property for tax purposes if the following are true:

  • You own the property; you are considered the owner even if you hold a mortgage on it.
  • You use the property as part of your business or as an income-producing activity.
  • The property has an effective life that can be determined for calculation purposes.
  • The property is expected to last for at least one year.

An important caveat: If you place a rental property into service and discontinue it within the same year, you cannot depreciate it. Additionally, you can only depreciate the cost of the buildings, or improvements; since it can't be “used up,” land cannot be depreciated. Likewise, you can't depreciate the costs of landscaping, clearing, or otherwise altering the land.

When Can You Start Taking Depreciation Deductions?

You can begin taking depreciation deductions on a rental property as soon as it is ready and available for use as a rental. In other words, if you buy a property in April, work on it in May, list it for rent in June and fill the vacancy in July, you can start taking the depreciation deduction in June – when it became available.

Once you've deducted the entire cost of the property, you must stop taking the depreciation deduction. If you take the property out of service, you must stop deducting depreciation – even if you haven't recouped the full amount.

The Basics of Calculating a Depreciation Deduction for a Rental Property

To calculate the depreciation deduction for your rental property, you'll need to know three things: your basis in the property, the recovery period, and the depreciation method to be used. Any residential rental property placed into service after 1986 must be depreciated using the Modified Accelerated Cost Recovery System, or MACRS. This technique spreads the costs and depreciation deductions over the property's useful life of 27.5 years.

  1. Figure Out the Basis of the Property – First, determine the rental property basis, which is the total amount you paid. In addition to the property's cost, the basis may include certain closing costs and settlement fees, including legal fees, transfer fees, recording fees, and title insurance. It may also include any other expenses owed by the seller, such as back taxes.
  2. Determine the Cost of the Land and the Improvements – Since you can't depreciate the value of land. It would help if you separated the cost of the land from the cost of the improvements. You can use the fair market value of each at the time of purchase or use the assessed real estate tax value.
  3. Determine Your Basis in the house versus the Land – Using the information from the previous step, calculate your basis in the house. If you bought the property for $150,000, and the assessment says the property is worth $100,000 — $80,000, or 80 percent, for the improvements and $20,000, or 20 percent, for the land — your basis for the house would be $120,000 ($150,000 x 0.80).
  4. Calculate the Adjusted Basis – You may need to adjust the basis you arrive at in some cases. Increases to the basis prior to service may arise from improvements or additions, certain legal fees and restoring damage to the property. Decreases may occur from insurance payments for theft or damage to the property or money obtained for granting an easement, for example.

    GDS vs. ADS

    Next, determine which depreciation method to use. The vast majority of the time, you will use the General Depreciation System, or GDS. In some instances, you may have to use the Alternative Depreciation System, or ADS. ADS may be required if you irrevocably elect to use it or if it's mandated by law. Instances in which it's required by law include if the property has a tax-exempt use, if it is financed using tax-exempt bonds, if its primary use is for farming or if it has a qualified business use 50 percent or less of the time.

    Once you know which method you're using, you can figure out the recovery period. GDS sets the recovery period for residential rental properties at 27.5 years. For ADS, the recovery period is 30 years if put into service on or after December 31, 2017, and 40 years if put into service before that.

    How Much Depreciation Can You Deduct Per Year?

    With depreciation deductions, you can spread out the cost of purchasing a property over decades, which allows you to reduce your tax bill every year for many years. A property depreciates by an equal amount per year – a rate of 3.636%. If it was put into service later in the year, the amount is less for that year. You can get the exact percentage by checking the IRS Residential Rental Property GDS table. Note that this rate is essentially equivalent to dividing the basis by 27.5.

    How does this help to save you money? You report rental income and expenses on Schedule E; the net gain or loss from that then goes over to your 1040 return. Depreciation deductions are applied on Schedule E, so they can reduce your taxable income. For instance, if you depreciate $4,122.65 and are in the 22% tax bracket, you can save $906.98 on your tax bill for that year through this method. Needless to say, this can really add up over time.

    Make the Most of Real Estate Investing with Depreciation Deductions

    As you can see, deducting depreciation from a rental property is a terrific way to reduce your overall tax liability. In some cases, it can even wholly offset any taxes that you may owe on the property, allowing you to pocket even more of your hard-earned money. To make the most of this technique, make sure to consult with a qualified tax accountant before getting started.

As of 2020, wholesaling is still one of the most underrated ways to get into real estate with little to no money or risk. New and experienced investors alike, this investment approach can produce significant revenue and contribute to your overall success as a real estate investor.

Basics of Wholesaling

When completing a wholesale deal, there will be three main players involved. The seller, the wholesaler, and the buyer. When wholesaling, you will be putting a property under contract and then selling your contract to someone else at a higher price. Since you are selling your contract, you are never closing on the property, which means you are not buying the property; someone else is. (This means no money, no credit needed from you). By doing this, you do not have to put down a large down payment, and you do not have to get a loan. The only money you will need is money for an earnest money deposit (EMD). In some cases, the EMD can be a minimal amount of money and can even be nothing at all.

What's the Next Step?

The trick to completing a successful wholesale transaction if you're low on money or credit is establishing your exit strategy beforehand. Start by building your network and try finding a buyer early. If you're not prepared to purchase the contract due to low funding, having a few potential buyers in mind can help ease some stress when coming to the end of your deal.

When wholesaling a property, you must put the property under contract at a discount. Why? Because you are placing the property under contract at one price and then selling to an investor at a higher price. There must be enough room or profit margin for the investor to pay your higher price. You can do this by offering to buy a distressed property. While you may not be in the position to do a fix and flip on your own, someone else might be. Making an offer on a distressed property can be easier because a lot of the time, the seller is motivated to sell quickly.

Making Offers

Most likely, you will have to make several offers to get one accepted, but that's OK. It costs nothing to make an offer. Making a low offer is also OK. If a seller accepts your first offer, you'll never know how much lower you could have gotten the property for. Remember, every dollar less that you can put the property under contract goes straight into your pocket. Let's look at an example. You find a property that has an ARV of $275,000 needing $25,000 in rehab. Let's say you can put the property under contract for $175,000. Say you sell the contract to an investor at $185,000, you make $10,000 and leave the investor $90,000 to rehab, pay money costs, holding costs, selling prices, and profit. Everybody wins!

So How Do I Start Wholesaling

Education! Every real estate investor should always start their real estate journey by getting the right education under their belt. Understanding the market, knowing the risks, analyzing potential exit strategies, and familiarizing yourself with the different processes of wholesaling will leave you feeling more confident and capable of performing a seamless wholesale transaction. Once you have the education, the only thing left is having the courage to take that first step. And that is up to you. 

What is Your Role as a Real Estate Wholesaler?

Real estate wholesaling is easy enough to understand as a process. However, you may be wondering about your actual role. Put simply; you'll act as the middleman between distressed or undervalued properties and the property investors who seek them out. You bring value to the equation with the time, effort, and skills you put into putting everything together. When done correctly, you'll become a reliable source for undervalued properties that investors otherwise wouldn't be able to find.

Top Characteristics of Successful Real Estate Wholesalers

So, is real estate wholesaling right for you? It probably isn't unless you have the following:

  • Property Valuation Education – The key to making money through real estate wholesaling is identifying properties that are undervalued enough to provide returns for you and the investors who ultimately acquire them. Therefore, you should be well-versed regarding the ins and outs of property valuation.
  • Negotiating Skills – As a real estate wholesaler, part of your job is convincing investors of the merits of the properties that you have to offer. This means negotiating with them to arrive at terms that still deliver substantial profits for you. Depending on your exit strategy, you might also have to make a deal at the closing table or at other times during the process, so be sure to hone those negotiating skills.
  • Marketing Prowess – One of the most crucial aspects of successful real estate wholesaling is effectively marketing yourself and your services. The better your exposure is in the local market, the more likely you will develop a pool of reliable buyers. Marketing also alerts others that you're interested in distressed properties, increasing the odds of coming to you when they want to unload them.
  • Real Estate License – Technically, you don't need a real estate license to engage in real estate wholesaling. However, many wholesalers obtain them to gain access to crucial resources like the MLS. Having a real estate license is also a great way to bolster your networking capabilities, and it might come in handy in other ways down the line.

    Top Characteristics of Successful Real Estate Wholesalers

    As a real estate wholesaler, real estate investors will be your primary customers. They fall into two categories: fix-and-flip investors and long-term rental property investors. You'll need to employ different strategies with each group.

    To appeal to fix-and-flip investors, you'll need an in-depth understanding of the costs of repairing and rehabbing residential real estate to ensure that the after repair value, or ARV, is high enough to ensure profits for all.

    To appeal to long-term rental property investors, you should be well-versed regarding many factors, including the local real estate market, the local rental market, current rent prices and local demographics. It will help enormously understand things from your buyer's perspective, including what they consider to be adequate cash flow, how much they can expect to collect in rent, and the costs of maintaining the property and other related factors.

    Steps for Building a Successful Real Estate Wholesaling Business

    Here are the necessary steps for developing a successful real estate wholesaling business:


    1. Research the Local Market – Educate yourself about the market where you'll be wholesaling real estate to more effectively identify distressed and undervalued properties with enough value to go around for everyone.
    2. Curate a List of Buyers – Next, develop a list of investors who buy distressed properties in the local area. Strategies for building such a list include attending real estate events, promoting yourself and your services on social media, engaging in email marketing and using bandit signs to share your contact information across the local area.
    3. Line Up a Reliable Financing Source – Although you typically won't need much capital to engage in real estate wholesaling, you'll still want a reliable source for obtaining financing when necessary. That's especially true if you plan to use double closing as an exit strategy, which involves personally closing on a sale and immediately selling the property to a real estate investor.
    4. Find Deals – Next, identify distressed and undervalued properties with enough “meat on their bones” to provide profits for you and your eventual buyer. As mentioned before, obtaining your real estate license will give you access to the MLS, which is very helpful in this regard. Alternatively, you can use sites like Zillow and even Craigslist; it's also often possible to search public property records online.
    5. Choose an Exit Strategy – Finally, you should have an exit strategy in place before engaging in real estate wholesaling. Most people opt to put down earnest money, sign a purchase agreement, find an interested buyer, and then sell the contract to them, which transfers the obligation to them. Alternatively, you could employ a double closing. In that case, however, you must be prepared to close on the deal, which involves a lot more money and red tape.

      Tips for Making a Profit in Real Estate Wholesaling


      Real estate wholesaling is not without its risks, so it's crucial to study up about it as thoroughly as you can before you begin. Understand that if you sign a purchase agreement and fail to line up another buyer, you'll have no choice but to fulfill your legal obligations to the contract. 

      There are ways to increase your odds of success as a real estate wholesaler. Be prepared to spend a decent amount of money on marketing; the most successful real estate wholesalers are highly effective marketers. Set aside plenty of time for networking events, and keep business cards with you at all times. Get educated regarding property valuation, using real estate comps to assess properties, the costs of repairing residential real estate, and any carrying costs that you may be responsible for along the way. Finally, learn strategies for turning leads into deals; the main trick is talking to people effectively, so honing your communication skills is always a good idea.



It's time! You've either acquired your first property through a tax lien, or you're doing an old-fashioned fix and flip. And… The property needs some work. The key to a successful fix and flip is knowing what rehab projects will add to the property's value without breaking the budget. A common mistake that many new real estate investors make is going overboard on the rehab. New granite countertops, a full bathroom remodel, some new floors, the works. Before you dive headfirst into your rehab, take a look at these do's and don'ts.

The Do's of a Fix & Flip

1. Know the Local Market

When rehabilitating a property, it's essential to look at other local rental listings to see the status quo. Does every listing show overly shiny granite countertops? If so, it may be smart to factor them into your budget. However, you'll probably find that many listings boast simple updates. Knowing the market can help you decide what renovations are necessary for your property to sell and which ones are overkill. Using a search tool like Zillow can help you get an idea of other similar properties.

You'll have an easier time with your fix-and-flip endeavor when you know the basics of the local real estate market. Current market trends will clue you into the types of features local buyers expect. For example, are home values currently rising or falling? How long are properties sitting on the market before selling? In a seller's market, you can typically get away with more straightforward improvements; in a buyer's market, you might have to include more upscale extras to fetch the price you need.

2. Analyze the Numbers

To make a profit, you'll need to know accurate numbers. Comparing the resell value to the purchase price and factoring in the anticipated rehab costs will help you get off to a good start. Knowing these numbers can help you determine your budget as well. If you purchased a property for $50,000, and it has a resell value of $90,000, it's safe to say you could put $20,000 worth of renovations in and still make a good profit on your investment. Whatever the margins are, it's important to know what you're working with to ensure a successful flip.

When you buy a property intending to flip it, you know its current market value. After analyzing the local market and comparable properties, or comps, you should have a clear goal to shoot for in terms of what you'd like to list it for when you're done. To get from point A to point B, figure out which repairs and renovations are needed to bring the property in line with similar ones. The result will be the property's after repair value, or ARV.

Determine the ARV for any property with this simple formula: 

Purchase Price + Value of Repairs/Renovations = After Repair Value

This formula won't do you any good if you don't base your information on realistic comps. The comps you use should be for properties sold in the local area within the last three months. Find comps that match your property as closely as possible in terms of the following:

  • Age – Comps should have been built within 5 to 10 years of the property that you're flipping.
  • Bedrooms and Bathrooms – Stick with comps with the same number of bedrooms and bathrooms as the subject property.
  • Square Footage – Choose comps that have roughly the same amount of interior square footage as your property.
  • Finishes – Consider the quality of finishes like flooring, fixtures, appliances, and the like, and select comps with a similar quality level in those areas.
  • Amenities – Consider any special amenities that the subject property has; ideally, comps should include similar amenities.
  • Lot Size – The lot's size should be taken into account, too; comparing the subject property with one that sits on a much larger or smaller lot will produce inaccurate results.
  • Curb Appeal – Likewise, the landscaping and overall curb appeal of the subject property should be similar to those of any comps that are used.

Create a spreadsheet to compare the subject property to the top three to five comps that you have found. Identify the home that sold for the highest amount, and then see what it has that the subject property lacks. Perhaps the comp has better finishes, for instance, or maybe it offers an attached garage while the subject property has no garage at all. This information will clue you into the types of repairs that you should make to get the price that you want.

3. Create a Budget, and Stick to It!

Once you have estimated the numbers, it's time to create a budget. Take a look at the needed renovations and what they cost. Will these repairs exceed your budget? If so, the property may not be worth the investment. On the other hand, if the numbers work, create your budget and stick to it. We recommend including a little extra room in your financial plan for unexpected repairs. While we all want to assume the best-case scenario, sometimes things come up. Including this extra cushion can keep you from exceeding your budget.

Creating a budget for your fix-and-flip property won't do much good unless it's based on timely and accurate information. That's why it's crucial to have a clear idea of how much it will cost to make the upgrades, repairs, or renovations needed to increase the property's market value to the desired amount.

Start by having a basic understanding of the ballpark cost of various types of home improvement projects. Some examples include:

  • Adding a Home Addition – $21,000 to $70,000
  • Rewiring a Home – $4,000 to $20,000
  • Installing New Plumbing – $500 to $2,000
  • Exterior Remodel – $5,000 to $15,000
  • Kitchen Remodel – $4,500 to $50,000
  • Bathroom Remodel – $6,000 to $35,000
  • Basement Remodel – $11,000 to $30,000
  • New Roof – $5,500 to $10,500

Next, contact local contractors for quotes. That way, you will know the exact cost of whatever rehab work needs to be done. Make sure that the quote includes the price of whatever new items you will need. Add a cushion of 15% to 20% for contingencies. As with any home improvement project, things happen, and unexpected costs often arise. It's better to have more than you need than to fall short and potentially lose out on additional profits.

At this point, you should be comfortable that the cost of performing the upgrades or repairs will increase the market value of the home to an acceptable level. Your knowledge of the local housing market should reassure that the property will be sold at the desired price when the work has been done. 

Of course, it is also important to keep timing in mind. Market conditions can change quickly, so make sure to have a realistic timeframe in mind for when the work can be finished. Sometimes the work can drag on for months and months, for example. In that case, you could end up listing the property under entirely different market conditions – and that could be a recipe for disaster if, say, the market has switched from a seller's market to a buyer's market in the meantime.

Finally, the most critical point of all: Stick to your budget no matter what.

If you hit a bump in the road and learn that a repair or renovation will cost way more than anticipated, it is better to back out and cut your losses than to end up in the red. Even with your cushion in place, it is always possible to end up with a property that will simply cost too much to repair to the point of profitability. Therefore, always be prepared to cut and run, knowing that there are still other opportunities to explore.

Rule of Thumb, Don't Go Overboard!

The easiest thing to do as a new investor is to get caught up in perfecting your first flip. Many new investors go overboard by adding all of the bells and whistles with the rehab, but it isn't always necessary. Knowing the local market, analyzing your numbers, and sticking to your rehab budget is a surefire way to know what renovations will help you, and what will hurt you.

Remember: No matter how many upgrades you make, the local housing market caps the maximum value that you can hope to get for your property. Therefore, the wiser strategy is upgrading the property to the point that it is in line with similar properties – not to the point where it is conspicuous. Most of the time, you can get away with performing simple yet effective repairs and renovations. Installing new carpet, freshening up the paint, patching holes, and swapping out some fixtures is often all that's needed. When it comes to fixing and flipping a house effectively, there's a fine line to walk; over time, though, you'll get better and better at knowing what to do, allowing your property investment prowess to improve accordingly.

Tax lien investing is an overlooked but safe investing strategy that has been around for centuries. State governments created tax liens to collect unpaid property taxes. An underrated form of real estate investing, tax liens are typically a high return investment and a great addition to any investor's portfolio.

If you are looking for ways to diversify your portfolio while potentially realizing considerable returns, tax lien investing may be a viable option to explore. However, as with any investment strategy, it's not without risks. Therefore, it's crucial to educate yourself about how tax lien investing works, including its potential pitfalls, before putting any money on the line.

How Do Tax Liens Work?

Every property owner is required to pay property taxes in the United States. Local governments use property taxes to fund public departments such as police, fire departments, schools, parks, and the construction of roads. In fact, property taxes are often a primary income source for many local counties. When a property owner doesn't pay their taxes, the government needs to find another way to collect that money.

When a property owner doesn't pay their taxes, the county places a tax lien on the property. The county will give the property owner time to pay off their delinquent taxes, but they will send the lien to auction if they fail to pay. The county will hold a public tax lien sale or tax lien auction to sell the tax lien certificate. The certificate price is composed of the delinquent taxes, plus any fees the county paid to bring the certificate to sale. Usually, anyone can attend a tax lien sale. When someone purchases a tax lien at auction, they do not satisfy the property owner's tax liability. They are simply buying a certificate for the amount of the property taxes. This is beneficial for the county because it allows them to continue to fund public programs.

So How Is Tax Lien Investing Beneficial For Investors?

As with any other delinquent payment, the property owner will be penalized for the delinquent taxes. This penalty passes directly on to the tax lien investor. The return is realized when the property owner either pays their taxes or if the property is acquired. If the property owner pays their delinquent taxes, they are responsible for paying the amount of the certificate, plus any accrued interest and fees. The most attractive aspect of tax lien investing is that you will get your money back, plus interest, when the certificate is redeemed. When the county receives the payment from the property owner, they send a redemption check to the investor. 

The payment typically comes in the form of a check or ACH. If the property owner does not pay their taxes, property acquisition becomes possible. Real estate investors will typically pursue this investment strategy because it is possible to acquire properties for a much lower cost than if they were buying it on the traditional market.

Getting Started with Tax Lien Investing

Not all states offer tax lien sales, so the first step in getting started with this investment strategy is finding out whether such sales happen in your state. Here's a current list of states that allow tax lien sales:

  • Alabama
  • Arizona
  • Colorado
  • Florida
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • New Jersey
  • New York
  • Ohio
  • South Carolina
  • South Dakota
  • Vermont
  • West Virginia
  • Wyoming

After confirming whether or not your state allows tax lien sales, follow these steps to get started. A quick note: This type of investing is not recommended for novice investors or for those who are not well acquainted with how real estate works.

  1. Choose a Property Type – Choose a type of property on which to focus your tax lien investing efforts. For example, you might choose to focus on undeveloped land or on improved land; you can also choose between residential real estate and commercial real estate.
  2. Contact the Treasurer – Next, contact the treasurer of the county where you will be bidding on tax liens to find out when and where the next auction will be held. Have them explain to you how such auctions work – are they held online or in person, for example? Obtain a list of rules and requirements for tax lien auctions in that county. In particular, find out what type of payment methods are accepted, and make sure you meet any applicable requirements.
  3. Get a List of Liens for Auction – The treasurer should also supply you with a list of property liens coming up for auction. This is important because it allows you to perform research on those properties and liens before attending the auction, increasing your odds of engaging in effective and lucrative tax lien investing.
  4. Perform Due Diligence – With your list of liens in hand, investigate each one to identify the most promising options. Remember: Not all tax liens are created equal. In fact, it's not unheard of for the value of a tax lien to exceed the value of the underlying property, which dramatically increases your exposure and risk. A good rule of thumb here is to divide the tax lien certificate's face value by the market value of the underlying property. If the resulting ratio exceeds 4%, cross that one off the list. Properties with tax liens are usually assigned a number within the parcels where they are located. Most municipalities allow you to look up information online, so you can visit the county website and search by the applicable reference number. You should then receive an array of information about the property and lien, including the property address; the name of the property owner; the legal description of the property; the assessed value of the property; a listing of any structures that are located on the property and a rundown of the condition of the property.
  5. If You Win at Auction – Armed with the information you have uncovered, attend the auction and bid on the most promising tax liens. If you win, you usually have to pay back the certificate to the county immediately. Now, the property owner is required to repay you for the entire amount of the tax lien plus interest. Interest rates vary by state and range from 5% to 36%; most commonly, they fall between 10% and 12%.
  6. Recoup Your Investment – The property owner must repay the lien within the assigned redemption period, which usually lasts anywhere from six months to three years. The vast majority of the time, the owner repays the amount in full before the redemption period expires. Only around 4% of such properties end up in foreclosure, so investors typically realize their returns through property owners' repayments.

Know the Risks – and Alternatives

As with any investing, it's important to understand the risks of tax lien investing. As noted previously, this type of investing is best suited for seasoned investors with solid knowledge of real estate principles. You must be able and willing to put time and effort into investigating available liens before bidding on them.

Failure to do your due diligence could cause you to lose serious money. For example, as noted previously, the tax lien's value could exceed the value of the underlying property; if the property owner doesn't pay, you will be out the money from the lien and stuck with a property worth less than what you have already paid.

Another thing to look out for is properties with environmental damage or extremely run down and dilapidated properties. The owner of such a property may not be incentivized to pay off any liens that have been placed on it, and you could again end up with a low-value property that could strip away any profit that you hoped to realize. 

Although rare, if you have to foreclose on a property during this process, you may find out that other liens have been placed on it. As the new property owner, you are now on the hook for those liens if you want to sell the property and recoup your investment.

Finally, commercial institutions have jumped onto the tax lien investing bandwagon en masse over the last several years. Big banks and hedge funds, with their massive volume, can easily outbid private investors, driving down the resulting yields. Luckily, an alternative has emerged: funds that invest in tax liens. It's an option that is worth considering, and it may be an excellent way to dip your toe into the pool without getting in over your head.

Buying tax deeds is not a typical starting point for new investors, but it can be a lucrative investment strategy. This niche of real estate investing can be an excellent resource for buying properties at a steep discount and can be used if you fix and flip houses, own rentals, or if you want a return on your money. This guide will explain what tax deeds are, how you can invest in them, and what you need to do before buying tax deeds as a real estate investment.

What is a tax deed?

All real estate is subject to property tax. When a property owner falls behind on their real estate taxes, a tax lien is placed on the property in the form of a tax lien certificate. Depending on the state, the owners have a few months to a few years to pay the taxes due. Eventually, if the taxes remain unpaid, the city or county will sell the property through a public auction as a means to recoup the back taxes owed to them.

In summary, a tax deed is a legal document that grants the governing body the right to list the real estate for sale through a tax deed sale to recoup the unpaid property taxes.

How does a tax deed sale work

Tax deed sales are public auctions, similar to a foreclosure auction that allows parties to bid on the property either in person or online. The county or city sets a minimum bid, which is typically the unpaid tax amount with any fees or interest to this point, and the property is sold to the highest bidder.

The city or county will deduct any taxes owed from the winning bid. If there are overages, a party with a vested interest in the property, such as a mortgage lender or possibly the property owner, can apply to receive the remainder of the tax sale. Tax deed sales require that the property be purchased for cash and request that a small deposit be made upon completion of the sale with payment in full to be made as quickly as 24 hours after the sale up to a few weeks later, depending on the state.

Some states have a redemption period after a tax deed sale, where the homeowner or a lienholder with interest in the property (such as a mortgagee) has the right to pay the unpaid taxes plus fees and penalties, redeeming their interest in the property within a specified period of time.

Other states have no redemption period on the tax deed. Once the property is sold at a tax deed sale, the property is conveyed to the new buyer, wiping out most debts or encumbrances, including mortgages, and giving the buyer ownership to the property from the sale date forward.

Properties acquired from a tax deed sale will have a cloud on title, meaning the property can not be conveyed until the defect is cured or resolved. This can be done in one of two ways:

  1. Filing a quiet title action, which is a lawsuit that establishes the buying party's title or claims in the property, quieting all other previous claims to the title (such as a mortgage of the prior owner). A quiet title action can cost $2,000 to $3,000 depending on the state and can take several months to complete.
  2. Order a title certification with a tax title curative consultant review and confirm the correctness of the sale/tax foreclosure. After verifying everything, the consultant will work with a title insurance agent, clearing the property's title. This can be done in as little as one month and usually costs $1,500 to $2,250.

How can I invest in tax deeds?

Most tax deed investors like buying tax deeds because properties can often be purchased for steep discounts compared to the property's market value, and they can be a unique way to find investment properties outside of the MLS. Once the property is purchased at the tax deed sale, the investor can:

  • Sell the property as-is (with or without owner financing).
  • Rehab the property and sell it.
  • Keep the property as a rental.

Sell the property as-is

If you bought the property for $48,910 and sold the property as-is, you would net roughly $14,000 (estimating 10% of the total sales price for Realtor fees, closing costs, and holding costs), with the entire transaction taking anywhere from one to three months.

Rehab the property

Let's say the property is in an area where the fix-and-flip activity is high, and you determine the property's after repair value is $125,000. Rather than selling it as is for $70,000, you put $35,000 into the property, and at that point, you will be able to sell it for $125,000 four months later.

Your total cost of the investment is roughly $85,000 (accounting for the purchase price, holding costs, rehab, and clearing title), which nets you about $30,000 after deducting 8% of the sales price for closing costs and Realtor fees.

Fix it up and keep it as a rental

Instead of selling the property, you decide to hold it as a rental. After putting $20,000 into the property to get it in rent-ready condition, you can secure a tenant for $1,200 a month. After holding costs like property management fees, property taxes, insurance, and maintenance reserves, you net $800 a month. Your total investment in the property is around $70,000, giving you a 13.7% return on your initial investment.

As you can see, there are several ways to invest and make money when buying tax deeds — as long as you conduct thorough due diligence and don't overpay for the property.

Where to find tax deeds for sale 

Every state has different laws regarding tax deeds or tax liens. Before you begin investing in tax deeds, it's best to identify one state to focus on and learn the state's regulations. From there, you can determine which county or city you want to start investing in.

If a state is tax lien only, that means there are no tax deed sales. The winning bidder at the tax sale is issued a tax lien certificate. This pays the city and county what is owed to them, and the tax lien holder earns interest on the delinquent tax amount until the tax amount is repaid in full.

Tax sales are typically held online through the county's auction software but may occur at the county courthouse in smaller or rural counties. Depending on the county or municipality, tax sales can be conducted daily, weekly, monthly, quarterly, or as rarely as once a year. 

Most counties advertise the sale process and how to register as a bidder on their website. Otherwise, call the tax collector directly to determine the process for buying tax liens or tax deeds. County websites also often have a list of pending tax deed sales or an auction calendar showing you the properties up for auction, when they go to auction, and the minimum bid. This list can be used to identify which properties, if any, meet your investment criteria, such as location, property type, or size and what your maximum bid will be.

What you need to do before buying tax deeds

While buying tax deeds can be a profitable investment, it can also be risky if not done properly. There are some essential things to know about and research before bidding on a property at a tax deed sale. Below are a few important things to take care of. 

Determine property value

When you buy a tax deed, you are purchasing a property without being able to examine the interior. It is possible to assess the condition of the property from the exterior, but in general, you will not assess the interior condition. For this reason, many tax deed investors assume the property is in poor condition when determining the value of the property using comparable properties. If the property is in better condition than anticipated, the value will only increase.

Determine your maximum bid

It's easy to get caught up in the bidding war and pay too much for a property. Once you've established a property value, determine the maximum amount you would be willing to pay for the property, considering the possible work it needs or the rental income you could collect. You may want to use the 70% rule most flippers would use or set your maximum bid at a percentage of its as-is value.

Regardless of which method you use, if you are a savvy investor, you will go into the auction knowing your maximum bid. If the bidding exceeds that price—stop. One of the biggest mistakes you can make in tax deed investing is overpaying for a property.

Check for other liens 

The process of clearing a title after a tax deed sale will wipe away certain liens, including open mortgages on the property. However, there are certain liens it will not extinguish, including:

  • Municipal fines.
  • Code violations.
  • Other tax liens.

Some counties will provide a lien search prior to the sale to help bidders conduct their due diligence on the property. This information may also be available in public records, but some code violations may not be recorded yet. It's a good idea to call the local municipality code department to determine if there are any recorded or unrecorded liens.

Buying Tax Deeds Can Be Challenging 

In some counties, buying tax deeds is competitive. For example, Florida has many of the top real estate markets in the entire country, making it a competitive place to invest. While you can find tax deed sales opportunities, properties are often overbid by novice investors, leaving very few deals available to purchase.

Don't be surprised if the property you wanted to bid on never makes it to auction. Out of the long list of properties set for sale, only a few will be auctioned. The taxes may be paid off just before the sale, or the homeowner may have filed bankruptcy, which temporarily pauses the collection of the unpaid taxes. You can research a lot of properties to only be able to bid on one or two.

In summary, buying tax deeds can be a unique way to find off-market investment opportunities at great prices — but not every property is a deal. Before you begin investing, keep learning about the tax laws for the state and county of your choice. Look at recent tax deed sales to see what properties are sold for and practice doing your due diligence to determine whether buying tax deeds in your area will be a worthwhile endeavor.


Retirement is something many of us ponder but often fail to prepare for adequately. On paper, saving up for retirement should be pretty easy for those who can start off when they are young: With a reliable and disciplined compound interest strategy, for example, you could open a high-yield savings account or set up layered certificates of deposit in a way that capital gains are reinvested right back into your investing portfolio. When you combine this strategy with periodic contributions, you could realistically inject your portfolio with exponential growth, but the investment horizon would have to last decades.

The problem with saving up for retirement using compounding and other conservative strategies is that life often gets in the way. Many individual investors can start off on the right foot with instruments such as 401(k) accounts that quickly appreciate thanks to market returns. Still, these gains are often withdrawn for various purposes such as down payments for new cars or properties, capital for a business endeavor, emergencies, or even well-deserved vacations. 

We all know that there is more to life than simply preparing for retirement. Our personal financial goals should always be pointed towards achieving financial independence and freedom, for this is when we can think about retiring with peace of mind. There are only a few actionable ways to reach financial independence, and investing in real estate could be one of the most reasonable. With the right property investment strategy, you could be on your way to reaching some of your financial goals before retirement. The real question here is: How can investing in real estate help you prepare for retirement? 

Let's look at the three primary ways you can invest in real estate for retirement purposes.

  • Real Estate Investment Trusts
  • Long-Term Rentals
  • Vacation Home Rentals

The descriptions below will give you an idea about how these investing strategies may fit into your retirement plans.

1. Real Estate Investment Trusts (REITs)

If you have an Individual Retirement Account or 401(k) plan, there is a good chance that the fund manager holds some REITs in the portfolio. A REIT is an investment in a collection of properties or other real estate assets. Like a mutual fund, they are instead a collection of properties. REITs have a special tax status that requires them to pay out at least 90% of their income as dividends. 

To a great extent, REITs are indirect means of property investing. Instead of seeing your name on the title of a home or commercial building, you hold financial security based on the real estate portfolio's value. An exciting aspect of REITs is that they can be traded like equity securities, which means that you can acquire them as easily as shares of Microsoft on publicly traded stock exchanges such as the Nasdaq. In fact, you can treat REITs just like stock, which means that you can place short positions or sell them whenever you want. 

As a REIT investor, you do not get to decide what to do with the properties; even if you acquired a significant amount of shares in the fund, the REIT managers would leave the investing strategies. Most REITs trading on Wall Street are actually exchange-traded funds (ETFs), which are pretty dynamic. When you have a Roth IRA or Roth 401(k) loaded with REITs, your tax efficiency is greatly augmented in terms of tax advantages. This is why many financial planners recommend this strategy to investors who are thinking about their retirement. 

3 Ways To Supercharge Your Retirement

2. Purchase Residential Property and Rent it Out to Long Term Renters

This is perhaps the most common form of real estate investing. Buying a property and renting it out is a traditional strategy that has become very popular in the 21st century because Americans are not as enthusiastic about becoming mortgage borrowers as they were prior to 2008. When you have housing markets such as San Francisco, where a one-bedroom apartment can easily rent for $3,000 a month, there is no question that there is money to be made as a landlord.

Every investing strategy has a catch, and becoming a landlord has a particularly significant one. First of all, you will need to consistently have tenants willing to pay enough for you to cover any mortgages or liens you have on the property. Second, landlords cannot escape having to make payments related to insurance, taxes, and maintenance. Finally, if a homeowners association in a neighborhood or condominium rules the property, you will have to comply with certain bylaws and rules. 

Rental property investing can provide an opportunity for above-average returns and may also become an excellent source of regular cash flow. Some people describe this real estate investing strategy as passive income, but this only the case when you retain a property management firm's services. Some retirees who enjoy being active and hands-on with their investments tend to gravitate towards rental properties; however, there is a learning curve that must be assimilated in order to become a landlord who is also an efficient investor.

Real estate investors who derive income from rental properties can also face risks such as the ones experienced during the COVID-19 pandemic of 2020, when federal and state housing regulators imposed a moratorium on demanding rent payments and on exercising the right to evict non-paying tenants. Something else landlords should keep in mind is that housing markets are not always constant; this was made clearly evident by the real estate crash of 2008, which devolved into a global financial crisis, but this should not dissuade you from considering this as one of your strategies for retirement.

3. Buy a Vacation Home and Rent It Out Part-Time

Owning a vacation property as an investment usually means that you can rent it out to tenants for shorter periods of time. If you have the right house in a sought-after location, you might be able to make as much money from a few vacation renters as you could from a year-round tenant elsewhere. With the advent of online booking platforms such as Airbnb, VRBO, and TripAdvisor Rentals, more retirees opt to become vacation landlords. 

One of the significant advantages related to this strategy is that investors have a lovely property in a vacation destination to enjoy. Let's say you can acquire a cottage near the beach in San Luis Obispo, a California vacation spot where prospective tenants are willing to pay top dollar to stay in. With just a few months of renting out this cottage, you will be able to pay the mortgage and housing expenses while still occupying the property for the rest of the year.

Real Estate is a Good Source of Passive Income

If we define passive income as a way to generate cash revenues without too much of an effort, real estate investment could fit this description in some situations. As previously mentioned, if you acquire five apartments that you intend to rent and actively manage as a landlord, this cannot be called passive income because there will be plenty of work cut out for you. If you purchase a condo unit in a maintenance-free building where a property manager handles tenants, this is a situation that is more akin to passive income. 

The key to a comfortable retirement is having enough passive income to support your needs. Investing in real estate early can supercharge your retirement. However, it is crucial to analyze the risks associated with real estate investing by doing thorough research. Finally, there is a way you can maximize and supercharge your real estate investment potential, and that is through property deed investing, which is closely related to tax lien certificate auctions. 

There are ways you can assume ownership of properties sold at a fraction of their market value, and that is through tax lien auctions and sheriff's sales. Many investors have funded their retirement with this strategy, which requires learning about the process and locating the best opportunities. Deed investing is not like the traditional process of purchasing properties through real estate brokerages; it requires access to information that is not provided by the Multiple Listing Service that home sellers and realtors depend on. If you want to learn about deed investing's profit potential, you need to check out Marketplace Pro today. 

Get in touch with our office today to schedule a free demo of the revolutionary Marketplace Pro Software.

Are you interested in real estate investing that is easy to enter with a high return rate and minimal upfront capital? Tax lien investing:

  • Is an easy, low-cost, and hands-off investment.
  • Funds local communities and keeps homeowners in their homes.
  • Is a safe, state-regulated opportunity that brings in monthly income.

Tax lien investing has been around for over 100 years, but some investors still aren't sure what it is or how it works.

Real Estate Is Still a Great Investment

Real estate investing is the closest thing to investing in a sure thing. Real estate is a classic, traditional investment type because of its stability. That said, real estate investments typically demand a lot of time and effort. Many people are put off by the idea of managing properties, maintaining them, and selling them.

If you don't want to get involved in buying property, flipping property, buying foreclosures, or managing full-scale properties, are you out of the market? With tax lien investing, you can get all the benefits and none of real estate investing drawbacks. Read on to learn more about this alternative way to invest in the real estate market.



  • What Is Tax Lien Investing?
  • How Does It Work?
  • Tax Lien Investing: How To Get Started
  • Is Tax Lien Investing Right For You?

What Is Tax Lien Investing?

It's a way to add real estate to your investment portfolio without having to buy homes, office buildings, or any physical properties. It produces fixed returns and doesn't require you to manage properties.

How Does It Work?

A tax lien occurs when a homeowner can't pay their property taxes. In response, the state or local government places a tax lien on the property. This means they can't sell the property until they clear the debt. A tax lien damages the homeowner's credit and prevents them from selling, refinancing, or borrowing against their home.

A homeowner in this scenario has three choices:

  • Pay the taxes, fees, and interest in full.
  • Try to dismiss the debt in bankruptcy.
  • Make payment arrangements with the government agency to pay the outstanding debt.

Typically, the homeowner makes payment arrangements.

In most states, this gives the homeowner up to three years to pay back taxes and interest. Every state has different payment deadlines. If the deadline comes and the taxes are not paid, the lienholder has the right to sell the house at a tax auction.

Is Tax Lien Investing Right for You?

As promising as all of this may sound, don't get ahead of yourself. Since the potential returns for tax lien investing are so good, the associated risks are often quite high. For one thing, there's no secondary market for tax lien certificates. For the duration of the redemption period – typically six months to three years – you won't be able to sell. Therefore, you must be willing to play the long game.

Although rare, another risk is that the property taxes are never paid, and you have to initiate foreclosure proceedings. In some cases, the value of the tax lien certificate exceeds that of the underlying property. The certificate expires once the redemption period ends, and you are left with no choice but to sell. Therefore, you could end up losing significant amounts of money if you don't do enough research.

The bottom line is that if you're not willing to assume the responsibilities of property ownership, tax lien investing isn't right for you.

When local governments need to collect past-due taxes from property owners, they have a few ways of doing so, and one of them involves asking investors for help in this regard. The agencies that engage in these financial practices are often property assessment and revenue authorities at the county level. In most cases, these agencies would prefer not to deal with the burden of managing property taxes that have fallen behind payment schedule; however, the reality of revenue collection is that some cases can only be settled through the sale of tax lien certificates.

As with various other activities related to debt financing, property tax liens offer investment opportunities. In the United States, there is a market for deed investing; moreover, since tax liens are attached to properties, many real estate investors choose to enter this market. Real estate investors often participate in tax lien investing because they have a chance to become lien holders of properties, which means if the owner wants to get their property back, they must pay back the investor with interest accrual whenever applicable. 

Tax lien investors also stand a good chance of becoming property owners if they are willing to go through the foreclosure process. Most newcomers to the world of deed investing assume that they will be able to take ownership of free-and-clear properties by simply paying off outstanding taxes, but this is not exactly how it works. The first thing to know about tax lien investing is that sales of lien certificates are promulgated by state law. Not all U.S. jurisdictions conduct tax lien auctions. Below is a complete list of states that have tax lien sales:

  • Alabama
  • Arizona
  • Colorado
  • Florida
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • New Jersey
  • New York
  • Ohio
  • South Carolina
  • South Dakota
  • Vermont
  • West Virginia
  • Wyoming

The District of Columbia also holds sales of tax lien certificates. States that are not included in the list above either do not sell lien certificates to third parties or do not follow a statewide process. In Alaska, for example, boroughs have leeway in making rules applicable to the management of overdue property taxes. Prospective investors should not assume that all states follow the same procedures. Some states are more attractive to invest in than others. In Iowa, lien investors bid on a percentage interest, so this can be defined as a deed investing state.

The most common tax lien mechanism consists of bidding on a certificate and collecting payments from morose homeowners who do not want to lose their properties. Let's say you register for a tax lien certificate auction in Florida, where the interest rate on overdue property taxes is 18%. Bidding auctions may result in lower interest rates, but you will have to pay for the tax due amounts, penalties, and interest accrued to the auction day. If you win the auction and pay for the certificate, you have effectively bailed out the homeowner, who is now indebted to you. 

Tax certificates are legal instruments created by revenue collection agencies; you do not have to worry about their validity. Let's say you are the highest bidder in the auction of a 10% lien certificate imposed on a lovely Florida beach home. The owner has 24 months to adhere to the repayment schedule, and you have a good opportunity to capitalize on the 10% interest rate, which is a lot higher than you can usually get these days on Wall Street. If, for some reason, the homeowner does not adhere to the repayment schedule, you could be in a position to foreclose and ascertain ownership interest on the title. Still, the percentage will depend on the lien position you end up holding minus other liens that may be attached to the property.

Risks Associated With Tax Lien Investing

If you're interested in tax liens as an investment, you'll want to make sure you're completely educated on the process before diving in. This is the most salient risk of deed investing; to protect yourself, you should contact the National Tax Lien Association to see what they can tell you about the seminar provider. 

Investing in anything without being educated and knowing what you're doing is a great way to lose a fortune, which certainly extends to tax lien and deed investing. United Tax Liens, the developers of Marketplace Pro, offer guides for prospective tax lien investors who wish to explore their options in this market, and it goes over various risks you should be aware of. The basic principles of investing apply to tax lien certificates: You should only invest what you can reasonably afford to do away with, which means you should not tap into your emergency cash reserves. 

Understanding the kind of risks you may encounter is crucial because you can learn to spot them and avoid them; for example, when conducting due diligence on a property owner, you should proceed with caution if you find out she is a real estate attorney who specializes in foreclosure defense.

In this case, you may have to fight an uphill legal battle if the owner ends defaulting on repayment of the certificate.

How to Get Started With Tax Lien and Deed Investing

Here are a few key aspects of tax lien investing for you to think about:

* Know what your goal is: Do you want to own the properties you're bidding on, or do you want to collect the interest the lien will generate? You may not always be able to foreclose and acquire the property easily. 

* Understand what you want before committing to investing: A lot of valuable properties will have the owner redeem the property before the sale or will have the mortgage holder (if there is one) step in and outbid you to protect their interest in the property. The losses are not substantial in this case, but some investors tend to get burned out when this happens. 

If there is a mortgage on the home, and you manage to get your hands on the lien, some states will allow the mortgage holder to redeem the certificate. In this case, liens you have on a home with a mortgage is a really solid bet that you will get paid back, with interest, on the lien. Not all mortgage servicing firms are easy to deal with, but all of them are backed by investors who shudder at the thought of placing their first-position lienholder status at risk. 

Whatever your tax lien investing goal may be, you can always count on losing if the property does not hold intrinsic value. This means staying away from dilapidated homes in blighted neighborhoods with a high crime rate. For example, a small home in the middle of the New Mexico desert is not something you should be interested in holding a tax lien for. A house with multiple claims on title from heirs, grubby relatives, creditors, and gold diggers is probably not worth the hassle. Let's face it: There is always a reason why folks are just letting their properties go. Sometimes it's because they aren't worth anything, and even the county revenue collection agency may be aware of this but will decide to go through with the lien certificate auction.

* Do as much diligence as you can on properties before you bid: You have to understand this is a county, borough, township, or parish process. Every jurisdiction will have requirements, dates, deposits, fees, and other intricacies for their auctions. If you try to spread yourself too thin, you won't be successful.

You should always stick with what you know. Pick a few counties to focus on at first and build your experience. Try attending a few auctions to get your feet wet; doing so will not only make you familiar with the process but also give you a chance to meet the sheriff's deputies, court officers, and clerks who handle auctions. Some jurisdictions will have a fair amount of paperwork and red tape for you to deal with, and it is always better to go through this process when you have already made key acquaintances. 

* A Note on Tax Deeds: If you want to own the property right after the auction, then you'll want to look for states that sell tax deeds at auction. Deeds are different from tax lien certificates in the sense that the jurisdiction knows that no one will step forward to invest unless they can get on the title, which is why they offer deed interest opportunities.

Learn More About Tax Lien Investing With Marketplace Pro

Did you know Marketplace Pro is similar to a Multiple Listing Service (MLS) platform for tax lien properties? Contact us to schedule a demo today so that you can learn how the software can help you find hidden investing gems around the country.

In the world of investing, due diligence can be described as the collection of good practices related to the investigation of any financial asset. Legendary investors such as Warren Buffett, co-founder of Berkshire Hathaway, are known to spend several hours each day fully engaged in due diligence prior to making any investing decisions.

In any situation involving investments, due diligence is completely voluntary. Despite being highly recommended, not every investor conducts due diligence, and many will only complete cursory evaluations of the assets they acquire. A day trader, for example, will probably not do any kind of evaluation of Microsoft shares beyond running them through a stock screening tool; the reason for this dismissal of due diligence is that day traders typically take market positions that do not last very long.

Understanding Due Diligence

When it comes to property tax liens and deed investing, skipping over due diligence is strongly discouraged. You will never want to ignore due diligence in any real estate transaction, and this is double the warning with tax lien certificate auctions. Investors who participate in deed auctions, which are sometimes referred to as sheriff's sales, are actually engaging in the potential transfer of real property, and this could turn into a nightmare if the highest bidder fails to conduct thorough due diligence on the property, its condition, and encumbrances.

Due diligence is a must for investors who bid on tax lien certificates, and it should start at least a couple of weeks before the auction takes place. Investors who plan to bid on actual deeds will have to deal with even more due diligence than those who only want to profit from the interest paid by homeowners who want to hold on to their homes.

There is a subset of investors who willfully ignore due diligence because they are pure gamblers. We are talking about individuals who understand that winning and losing are secondary to actually playing.

You do not want to be among these reckless investors unless you have plenty of capital to lose and law firms on retainer to handle the legal issues that may arise from troublesome deeds and tax certificates.

Due Diligence Checklist for Tax Lien Investors

If you are seriously considering investing in tax liens and deeds, the term due diligence should be at the top of your real estate vocabulary. Knowing what data to search for and how to interpret the information you encounter can make or break your investment.

In addition, performing due diligence keeps you from making mistakes, which can be costly in any kind of real estate transaction. But even though you know you should do your research, where do you start? Don't worry. We've put together a due diligence checklist that will kick-off your research.

We recommend starting your due diligence checklist by examining these FOUR components at the very minimum:

* Property value

* Other certificate holders

* Total roll-up amount

* The aerial view of the land

1. Examine the Property Value

To start examining the value of a property, you will need to find the fair market value. Fair market value refers to the price a purchaser would be willing to pay for that property. Using online valuation tools like Zillow, Redfin, or other similar sites can help provide an estimated assessment of the property's worth. 

It is important not to get fair market value confused with the assessed value, appraised value, or potential sales value. The FMV is determined utilizing comparative market analysis, which is what real estate analytics websites such as Zillow utilize. The appraised value is what the property is actually worth after a licensed professional evaluates it. The assessed value is what tax revenue agencies use to calculate property value due, and it is related to land value and historical demand.

2. Identify Other Certificate Holders

More often than not, a property has multiple years of delinquent taxes. This isn't necessarily a bad thing but could be if you don't identify them beforehand. For example, if you bought a tax lien from 2014, there might be other tax liens from the years 2015 and 2016 on the property. As an investor, you will be required to “buy out” the other lien holders if you plan on filing a tax deed application (TDA) to acquire the property.

In addition to others who may be holding previously unpaid tax lien certificates, there may be other encumbrances on the property such as mortgages and lines of credit. In some cases, the Internal Revenue Service may have attached a lien for unpaid federal income or capital gain taxes. There could be mechanic's liens from contractors who were never paid for maintenance, repairs, or improvements. Finally, creditors may have won a lawsuit against the property owners on a simple motion for default.

3. Know the Roll-Up

A roll-up is the sum of all tax liens on the property plus any administrative fees imposed by the county revenue agency. Most investors who are looking only to collect interest on the certificate will get tunnel vision by looking only at the tax owed, but this may accurately reflect the roll-up. For instance, if you purchase a certificate that is close to expiration, a TDA will need to be filed. You can find this information by accessing the county treasurer's page or at the recorder's office.

The roll-up will let you know if it is actually worth to bid on a tax lien certificate and whether the threshold is worth registering for the auction. Once you start looking at a 4% interest situation, the certificate becomes less appealing, and it is at this point when you should start thinking about worst-case scenarios.

4. Get an Aerial View of the Land

Many people shy away from tax lien investing because they're afraid of purchasing a property in poor condition. But using a GIS map, Google Maps, or Google Earth can provide a visual of the land you're purchasing. Checking county records coupled with an aerial view will allow you to see if the property is landlocked or in a body of water (wetlands, swampland, etc), and this will allow you to check to make sure that the legal description matches. You can even use Street View on Google Maps, if available, to get an idea of what the property and the neighborhood look like.

One word of caution about using Google Maps: The satellite views may not be as up-to-date as we would all like them to be. If you are looking at a plot of land located on a flood plain, for example, you should think about when was the last time a storm surge impacted the region, or if it has been affected by accelerated erosion. A combination of active hurricane seasons and erosion could turn dry land into swampland in just a few years. The most dedicated deed investors are known to get recent photos of the properties they are interested in; to this effect, some of them contract the services of local photographers who can fly a drone over the property for fresh aerial images. 

These four key components are part of an excellent start to creating a due diligence checklist and every new investor should work on mastering this process. It is nearly impossible to create a plan of attack or develop an appropriate exit strategy if you have not done your responsibility of due diligence. 

As previously mentioned, investors who are after deeds will be obligated to go deeper with their due diligence. A thorough title search, for example, will let you know if there is a chance of individuals who could file an ownership claim on the property; think about heirs, banks, creditors, former spouses, gold diggers, and others. Title claims can be more challenging to clear than liens. Potential environmental issues can also create unwanted headaches, and these are easier to spot if you check with the state and county agencies that handle these matters because they are supposed to inform the public about them. Some information on the property owners could also help you guide your investment decision. Suppose you land a tax lien certificate on a property owned by a foreclosure defense attorney, for example. In that case, you may have to deal with legal challenges when attempting to take possession.

You will have to complete the amount of due diligence before bidding on tax lien certificates, or deeds will vary from deal to deal. You can get an idea of how much due diligence may be needed when you evaluate the property description, and this is when Marketplace Pro software comes in handy. 

If you are familiar with the Multiple Listing Service platform used by real estate brokerages, you will love the intuitive user interface of Marketplace Pro, which is the first step tax lien investors should take when evaluating investing opportunities. Contact our office today to arrange a free demo of Marketplace Pro; once you get the hang of it, we can start discussing due diligence strategies.

If you need to diversify your investment portfolio and have a solid understanding of how real estate works, tax lien investing may be a viable strategy to consider. In 2017, approximately $14 billion in property taxes went unpaid in the U.S. This accounts for about one-third of those taxes were sold off to private investors – and many of them enjoyed nice rates of return. However, tax lien investing isn’t something that one can just jump into. Competition can be fierce. In this overview, we’ll explore the basics of tax lien investing, including:

  • how it works
  • who it’s right for and;
  • its advantages and disadvantages.

About Tax Liens and Certificates

When a property owner hasn’t paid taxes on property that they own, the local government issues a lien against it. This lien states that the property can’t be sold and ownership can’t be transferred until the amount that is owed is paid in full. When a lien like this is issued, a certificate is created. This certificate includes the total amount that is owed plus penalties and interest.

Municipalities – typically counties – often auction off these certificates. Municipalities can collect the money that they are owed right away by passing off the debt to the highest bidder. That person then assumes the right to collect payments, including interest, from the owner of the property through the redemption period. This period usually lasts anywhere from six months to three years. The vast majority of property owners repay the full amount by then. If they don’t, the owner of the certificate – the investor – is entitled to foreclose on the property to recoup the money.

Tax Lien Investing Basics

When an investor buys a lien certificate at auction, they agree to pay the amount of taxes that is owed for the right to collect that amount back from the property owner – plus interest. Interest rates for these certificates vary from state to state, which is why it’s important to understand local rules and regulations pertaining to these types of liens. The interest rate in Alabama, for instance, is 12%; in Florida, it’s 18%. 

Redemption Period

Over the course of the redemption period, an investor can collect a fair amount of money from repayments made by the property owner. In rare cases, when the owner fails to repay the amount that is owed by the end of the redemption period, the investor may place the property into foreclosure; however, this is not a reliable way to make steady returns. Even when it does happen, additional liens are often uncovered – and they can end up putting an investor in the red over the long run.

Tax Lien Investing vs. Tax Deed Investing

It’s worth noting here that there are big differences between tax lien investing and investing in tax deeds. Currently, 36 states have tax lien sales, and 31 states have tax deed sales; some states have both. With tax deeds, investors bid on the property title instead of on rate of return. If they bid and win, the tax deed is transferred to them. At the end of the redemption period, the investor may be able to pay off the delinquency and assume ownership of the property. In other words, they don’t gain the right to collect interest payments but are banking on being able to sell the property later.

Who Should Participate in Tax Lien Investing?

Tax lien investing isn’t right for everyone. Ideally, you should have a good amount of investment experience under your belt, and you should have a solid understanding of how real estate works. That’s because you will spend a lot of time investigating various properties to determine whether or not bidding on a particular lien makes sense. It pays to know how to work with real estate records and to have a good understanding of real estate terminology, for example.

Understanding Tax Lien Auctions

It also helps to be familiar with real estate auctions. That’s because tax lien auctions are quite similar, but they do vary from municipality to municipality. For example, some auctions work through a process of bidding down the interest rate. In this case, the municipality establishes a maximum interest rate for the certificate; the bidder asking for the lowest rate below that maximum wins. Other auctions work through a process of bidding a premium on the lien; in that case, the bidder offering the highest premium over the amount of the lien wins.

Because these auctions and their rules vary from place to place, it is crucial to do your homework before even attempting to enter the arena. Therefore, you should decide which county or counties you will focus on and then learn how they do things.

Pros and Cons of Tax Lien Investing

Before delving into the world of tax lien investing, it helps to understand the advantages and disadvantages.

Top advantages of tax lien investing:
  • Gain real estate exposure without investing in physical real estate
  • Get your hat in the ring with very little upfront capital – sometimes for as little as a few hundred dollars
  • Receive a lump-sum payment from your investment efforts
  • Enjoy a reliable and fairly predictable rate of return on your investment
Top disadvantages of tax lien investing include:
  • Not a viable way to generate residual income over time
  • The amount of interest that can be collected is limited by local municipalities
  • Subsequent liens that are uncovered can negate any potential returns
  • Competition is fierce – especially since so many institutional investors are involved
  • It is a time-consuming enterprise that involves a lot of research

Tax Lien Investing Steps

If you aren’t scared away from tax lien investing yet, you would probably like to gain a clearer picture of how the process works. Again, things vary depending on where you will be doing the actual investing. However, here’s a breakdown of the basic steps that are involved:

  1. Consider the Market: With tax lien investing, depressed real estate markets are better than hot real estate markets. In a thriving market, property owners can usually sell quickly and easily, giving them less incentive to work toward paying off old liens. Market conditions can vary from area to area, so do some research to identify areas that are more amenable to profitable tax lien investing.
  2. Choose a Property Type: Since this type of investing is so complicated, it helps to focus on one or two property types. For example, will you focus on commercial properties or residential ones? Will you look for liens on vacant land or on improved land?
  3. Contact the Local Treasurer: A huge factor in enjoying success with tax lien investing is knowing how the local system works. The best way to figure this out is by contacting the treasurer for the county or other municipality where you will be bidding on liens. The treasurer can tell you when such auctions are held, and they can provide you with a list of liens that will be up for auction. Make sure to also obtain the rules that go along with such auctions from the treasurer; for example, if you win, are you required to pay with cash, personal check or money order?
  4. Perform Due Diligence: After narrowing down the list that you get from the treasurer, perform research on each available option. Steer clear of properties that have incurred environmental damage or other major issues that could render them virtually worthless. Similarly, watch out for properties that are in such bad shape that the owner won’t be incentivized to get caught up with their back tax payments. It’s entirely possible for a property to be worth less than the lien that is held on it. A good rule of thumb is to divide the face amount of the delinquent lien by the current market value of the property; if the ratio falls above 4%, do not bid on that one. Check county records for in-depth information about the lien and property, including the legal description, property owner name, property address, assessed value, condition and descriptions of any improvements.
  5. Enlist an Attorney: Regardless of your level of expertise in this area, it is always wise to have a skilled real estate attorney on hand to look everything over for you along the way. Of course, paying for an attorney will cut into your returns, so this can be a bit of a double-edged sword.
  6. Bid on Liens at Auction: Have a maximum bid in mind before attending the auction. Make sure that you have whatever you will need if you win, such as a cashier’s check. Understand that bidding wars often happen at these auctions, and they can drive down the rate of return; this is an especially big problem for private investors, who often must compete with institutional investors with a lot more volume.
  7. Win an Auction: If you win on a bid, you are typically required to pay the full amount due to the municipality in full. You are also required to contact the property owner in writing by certified mail within a certain period of time. The letter must inform them that you have purchased the lien on their property and state the amount that is owed in back taxes. Later, a second letter needs to be sent if the redemption period is about to expire and the owner hasn’t paid back the full amount yet. Again, however, this rarely happens; about 98% of the time, the amount is repaid, the property remains in the owner’s possession and the process is complete.
  8. Collect Payments: Once you are in possession of the certificate, the property owner makes payments to you throughout the redemption period. These payments include the amount of interest that was agreed upon under the terms of the auction. In the very unlikely event that payments aren’t made, or that the full amount is not repaid, you can proceed to take action to foreclose on the property. However, if subsequent liens are uncovered, you may end up on the hook for them before you can do anything else – which is exactly why this type of investing is not without serious peril.

Passive Tax Lien Investing: A Viable Alternative

With so many variables at play, tax lien investing as a private, individual investor can be pretty uncertain. Once you get to the point of locking down an interest rate through an auction, of course, you have a solid idea for how much you can make. Along the way to that point, however, there are lots of potential pitfalls. Finding the time to investigate several options in-depth – and knowing how to do it properly – is a tall order for most. On top of that, many big players, including money managers and huge investment firms, have entered the tax lien investment world and made it much more difficult for private individuals to make good money since they drive down rates of return through sheer volume.

If this sounds discouraging, you might consider investing in tax liens in a more passive way through a National Tax Lien Association investor. These days, nearly 80% of tax lien certificates are sold to NTLA members. Members with portfolios with less than $1 million pay around $500, and the fee for institutional investors ranges from $2,000 to $10,000 on average. By going this route, you can rely on an annual return of between 4% to 9%. That is lower than what you could potentially get on your own, but you avoid most of the serious perils that are involved in going it alone.


When it comes to real estate investing, investors tend to focus more on buying and selling for profit or on purchasing investment properties. Tax lien investing offers a unique way to gain real estate investing exposure without investing in real property, which isn’t right for everyone, and it can be a good way to further diversify a portfolio. With some research, time and planning, it might be a viable way for you to enhance your current investment strategy.