Tax Lien or Stock Investment
There are different factors that play a role in Tax Lien Investments. The question is whether you want to invest in the short term or long term, how much capital you have and your knowledge on the specific topic. Depending on your individual situation and what you prefer, one of the investment forms may be more suitable for you.
We will discuss the respective advantages and disadvantages of the different investments and compare them directly.
Tax Lien Investment
Tax Liens are a more than 200 years old and therefore also proven form of investment.
Property owners in the USA have to pay a property tax. If they cannot pay the tax debt, the responsible county can impose a tax lien on the property. Tax lien certificates are then auctioned off to investors in live and online auctions. The investors advance the tax debt, so to speak, and the debtor is given a redemption period in which he has a chance to settle his debt after all. After repayment by the owner, the investor gets back his investment sum with interest.
Share investment
The investment in shares is very popular nowadays, also because there is no more interest on savings.
When investing in securities, you become the owner of a share in the total assets of a company (joint stock company), you become a co-owner.
Shares are often also tradable on the stock exchange, and thus online.
When purchasing shares, there are two ways for investors to earn money, with dividends and with price increases. However, not all companies distribute the profit shares, these can also be reinvested in the company.
Important criteria in comparison
Risk
Investors are very likely to get their investment back with interest in Tax Lien Investments. In addition, the risk can be reduced to a minimum with a good education, observance of all rules and requirements and extensive research.
On the other hand, with stock investment, the risk is higher. Diversification (investing in different industries) can also reduce risks, but those who want to invest in stocks should still be prepared for possible losses.
Share prices are also dependent on news. Positive or negative news can lead to price jumps. With large, established companies, price fluctuations are less frequent, which means that the risk of a price drop is lower, but a risk always remains with shares.
Return opportunities
With Tax Liens, annual interest rates can be as high as 36%, with the average being around 10-15%. If an investor buys a Tax Lien certificate, he will get back his investment sum with interest and possibly further fees as soon as the property owner pays his debts.
How high the return will be depends on the following factors:
- Interest rate in the state
- Auction procedure
- Bidder competition
- Repayment period, or time period until debtor pays
Stocks can also offer high yields. There are 2 sources of return here: Dividends, profit share payouts when the company makes a profit, and price gains. How profitable the investment is depends on the performance of the company in which it is invested.
Collateral
In Tax Liens, the land (+real estate) that stands behind the tax lien certificate serves as collateral. In the rare event that the owner of the property fails to pay his debts, you as an investor have the opportunity to become the owner of the property. The object, like a house with a garden, thus serves you as a security in case the debtor does not pay.
When investing in shares, there is no comparable security as with the American tax liens. In the worst case, investors could also lose the entire investment amount. With shares only money should be invested, which one can spare problem-free.
Work and time required
Tax Lien investments require knowledge about this form of investment. Once you have successfully completed the first steps, such as establishing a US company, applying for EIN, and opening a US bank account, the main effort is only to look for good Tax Lien investment opportunities, make a careful review of them, and keep track of deadlines.
Even when investing in stocks, the basic knowledge of the stock market is inevitable for successful investments. After that, similar to Tax Liens, the effort is to research good investment opportunities and manage them.
Global investment
With Tax Liens, many states and counties now offer online auctions. Thus, participating in Tax Lien auctions is easy even from outside the U.S., i.e., worldwide. There is no need to travel to the USA. You can invest in this investment from the comfort of your home, all you need is a computer (or laptop) and an internet connection.
Provided your shares are tradable on the stock exchange, you can manage them from home, for example through a securities account with an online broker. As with Tax Liens, all you need in this case is a computer with Internet access.
Required capital
Tax Lien certificates are available in different price ranges. Per unit, prices start from as little as US$25, but it can also go into the 5-digit range or higher. On average, a Tax Lien certificate costs between US$2,000 and US$3,000. As a Tax Lien investor you have the possibility to invest in this investment even with a small capital, but the question is whether it is worth it at all.
If you want to make a profitable investment out of this form of investment, you should have a certain amount of money at your disposal. We speak here of at least 10,000 €, which should be planned as starting capital.
With the investment in shares it behaves similarly as with Tax Liens. Investments are already possible with a small capital, it is worthwhile only from about 5,000 €. Below that, the chances of return are rather low.
Acquisition
Tax Liens are acquired in auctions. There are several possibilities: Live Auctions, Online Auctions and Over The Counter (also possible online).
Tax Liens cannot be purchased at any time. Auctions are held in different states and counties only at certain times, such as monthly or only once a year.
Stocks can be purchased through banks and brokers. If shares of a desired company are tradable on the stock exchange through an online broker, they can also be bought and sold directly online through a custodial account.
When buying securities, investors are not bound to certain times, these can be bought and sold again at any time.
Prerequisite for investments
Tax Lien Investments are only offered in the USA. English language skills are therefore required. With translation programs (e.g. Google Translator) it is nowadays easily possible to have texts translated on the Internet. With a basic knowledge of English you should be able to do well, but if you have no knowledge of English at all, it will be very difficult to invest in Tax Liens.
To buy Tax Liens, investors need a US company, an identification number (EIN) and a US bank account.
A securities account through a custodian bank or broker is required to purchase shares.
Commonalities
Investors can invest in both tax liens and stocks with a relatively small investment volume. However, in terms of returns, both investment options are only worthwhile above a certain level of capital. With the share investment at least 5,000 € should be freely available, with Tax Liens even at least 10,000 € starting capital should be present.
Both forms of investment should be considered in the longer term and can represent a highly profitable investment.
Through online-based purchase, it is possible to invest in both asset classes from anywhere in the world.
Differences
Risks are higher with equity investment. With tax lien investing, risks can be kept to a minimum with proper preparation. Tax Liens are paid out with high probability and the property serves as collateral.
Investments in stocks are not time sensitive, investors can decide when to buy or sell. Tax Lien investors are bound by state and county auction dates. The payout of the investment amount with interest can also not be determined by the investor, but depends on the redemption period and the solvency/payday of the debtor.
Tax Lien investors can calculate a possible profit after purchasing a certificate. How high the yield will be then depends only on the debtor’s payment date. In the case of shares, only current data can be used to calculate a return. How high profits might be in the long run cannot be planned or calculated in advance, only speculation is possible here.
Shares are very well known and popular, tax liens, on the other hand, are known to only a few investors. One reason for this is that financial advisors and banks are not allowed to charge commissions for recommending Tax Liens. Therefore, tax liens will not even be suggested to you as an investment option.
When it comes to investing in stocks, the situation is quite different. Banks benefit directly when their clients invest in stocks through them. Presumably, your advisor at the bank has already recommended investing in various equity funds to you.
Conclusion: In comparison, we can see that both forms of investment have many positive aspects. The main differences are in the type of investment, the level of risk and the level of awareness. Both tax liens and stocks can be lucrative investments. With both types of investments, investors can start with relatively little money, but they are not profitable until a certain amount of capital is invested. Other factors for successful investments are the acquisition of detailed knowledge, research, a strategic approach without emotions and with a good money management and finally also the own interest. A successful investment requires that one has fun with the investment and likes to deal with it.
