At which point is an investment in Tax Lien profitable?

How much do Tax Liens cost?

Tax Lien certificates can be purchased in live or online auctions. The individual certificates are offered there at very different prices. With this form of investment, it is already possible to purchase Tax Liens from as little as US$25 each. The price for individual certificates can also go into the 5-digit range or even higher. On average, Tax Liens are priced at 2,000 to 3,000 US$.

Low-priced Tax Lien Certificates

Investors who still want to gain experience can also start with the low priced Tax Liens. Why this is not desirable in the long run, we will learn in a moment.

Are low priced tax liens profitable?
In the case of very cheap certificates, the question arises as to how high the annual return will be and whether we will make any profit at all with it, taking into account ongoing costs.
Tax Liens can be a very lucrative investment, as interest rates of up to 36% per year can be achieved, with the average being around 10 to 15%.

Let’s illustrate the return on low-cost investments with an example.

Calculation example for a low-cost investment

Simplified example 1: An investor with a small capital acquires 32 tax liens worth 80 US$ each in one year.
For 24 Liens, the interest is 10% per year, and for the remaining 8 Liens, he receives 17%. He invests a total of US$2,560. The land owners repay their debts after one year. Thus, the investor receives US$8 in interest for each of 24 certificates, and US$13.60 for each of 8. His profit is therefore 300.80 US$.

Investment 2,560 US$
Certificate prices each 80 US$
Interest per Lien/year 10 % and 17 %
10 % interest per Lien/year 8 US$
17 % interest per Lien/year 13.60 US$
Total profit 24 x 8 + 8 x 13,60 = 300,80 US$

What do you think, is it worth investing in only very cheap tax liens?

Let’s illustrate this with another example.

Calculation example for Tax Liens starting from 500 US$

Simplified example 2: An investor also purchases 32 Tax Lien certificates in one year. However, he invests only from a certificate value of 500 US$. Of the 32 Tax Liens, 20 cost US$500, 8 cost US$700 and 4 cost US$2,300. His total expenditure is thus US$24,800.
The debtors pay after one year, for the 500 and 700 US$ Liens the investor receives 10% in interest, for the 2,300 US$ Liens 17%. In total, this results in a profit of 3,124 US$ for him.

Investment 24,800 US$
Certificate prices 500, 700 and 2.300 US$
Interest per Lien/year 10 % and 17 %
10 % interest per 500 US$ Lien 50 US$
10 % interest per 700 US$ Lien 70 US$
17 % interest per 2,300 US$ Lien 391 US$
Total profit 20 x 50 + 8 x 70 + 4 x 391 = 3,124 US$

Calculation example for more expensive Tax Liens

Simplified example 3: Let’s assume again that an investor buys 32 Tax Lien certificates in auctions. The investor has a higher investment volume and can therefore purchase more expensive certificates. Of the 32 Tax Liens, 19 cost US$2,400, 7 cost US$3,500 and 6 cost US$5,200. For the 2,400 US$ and 5,200 US$ Tax Liens he receives 10% interest, for the 3,500 US$ Tax Liens 17% interest. His investment is US$101,300. The debtors also pay in this example after one year, so the profit for the investor is 11,845 US$.

Investment 101,300 US$
Certificate prices 2,400, 3,500 and 5,200 US$
Interest per Lien/year 10 % and 17 %
10 % interest per 2,400 US$ Lien 240 US$
10 % interest per 3,500 US$ Lien 595 US$
17 % interest per 5,200 US$ Lien 520 US$
Total profit 19 x 240 + 7 x 595 + 6 x 520 = 11.845 US$

Conclusion: In the first example, a profit of only 300 US$ was achieved after one year, whereas investing in slightly more expensive Tax Lien certificates, which were priced between 500 and 2,300 US$, resulted in a profit of more than 3,000 US$. In the third example, with a high investor capital, even almost 12,000 US$ in profit could be booked.
From the profit still the costs must be deducted, which result with this Investment standard. More about this in the next section.

From which price range should one purchase Tax Liens?

In the auctions a small fee is due. In addition, profits must also be taxed. Investors must also factor in the annual costs for their company and other costs, such as for a tax advisor. And in the end, not only should the costs be covered, but a positive return should also be achieved. In which price range one invests depends of course on the capital.

In the case of Tax Liens, an investment is only worthwhile from US$500 per certificate because of the additional costs.

If you want to get acquainted with the whole business, you can also invest in the cheap certificates. However, if you want to achieve a positive return at the end of the year, you are not well positioned by investing only in very cheap Tax Liens.

How high are the running costs, or follow-up costs with the Tax Lien Investment?
There are annual fees for your own company. The amount of the fees varies depending on the state and agency, can be for example 200 US$ per year. An expert tax advisor should be consulted as soon as you invest in Tax Liens. On average, this costs about US$ 1,000 per year. Taxes must also be paid on the profits. The costs reduce the profit, which is why one should think in advance about the Tax Lien investment, when the costs will be balanced and how one should proceed to get into the plus area.

Initial capital

In order to be able to achieve a positive return with Tax Lien investments, one should acquire certificates as an investor only starting from 500 US$. Therefore, this form of investment makes sense only from a certain capital.
Before making an investment, a number of requirements must be met. First and foremost, a US company formation and the opening of a US bank account. For the formation of a company through an agency, there are only low costs for selected states and providers, but fees have to be paid annually. Profits from investments must be taxed. Professional advice is required for tax matters. Therefore, as soon as investing in Tax Liens, an expert tax advisor should be consulted. You should definitely factor in these subsequent costs when making a Tax Lien investment.

For this reason, a Tax Lien Investment is only recommended from at least 10,000 € investment start capital, if you want to make a profit with it.

With a successful Tax Lien investment, with a positive balance, the wealth accumulation can be advanced, because the profits can be directly reinvested in Tax Lien.