Today, investing in the traditional stock market is no longer a safe and sure route. With the unsteady state of our current economy, the market has regular ups and downs with dramatic swings that can create some big losses. On the other hand, however, safer forms of investments like mutual funds do not make great returns, making seasoned investors wary of these types of investments. This has left investors looking to alternative investments where rate of return has the potential to be high while also being safe.

A type of investment called tax lien investing does just that.

What is Tax Lien Investing?

Tax liens are essentially measures taken against homeowners who owe a large amount of back taxes (taxes that are overdue). It prevents the homeowner from selling or refinancing their homes until the taxes are paid.

If a homeowner or property owner has not paid the required taxes, tax lien certificates are issued by municipalities. These certificates are then bidded at an auction (online or in-person) and sold to the highest bidder in order for the city to immediately recover the taxes owed to them; this is where investors come in.

After the certificates are bidded, investors now hold the lien of certain properties. Usually, investors have the choice of which type of properties they want to invest in. Once the lien is bought by the investor, the property owner now must repay the amount at which the lien was bought, plus interest. Payment arrangements are usually set up between the property owner and the holder of the lien (the investor).

Pros and Cons of Tax Lien Investing

Tax lien investing is generally not recommended for investors that are just starting out or getting the handle on investing. This is because this type of investment can put you at a risk of significant losses if you are unsure of what you are doing. Potential for big returns are abundant, however, and thus attract seasoned investors who wish to do investments that are a little different.

Like all other investments, there are a number of things to be aware of before jumping straight into investing. For tax lien investing, it is essential to have some understanding of the properties and property-owners before taking over the property’s liens. This is due to the fact that the risk in tax lien investments lies in whether or not the owner can pay the lien — and if they cannot, whether or not the property can be sold off at a good price.

As such, with the unstableness of the stock market along with low rates of return from more safe and traditional investments, tax lien investments is an alternative type of investment that have the potential of making high returns while still remaining relatively safe. However, there are still risks involved due to its nature as a debt-related investment.

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