Real estate investing can be a complex but highly rewarding field, and one often overlooked strategy is tax lien investing. Angela Duncan, an expert in this niche, joined Dwan Bent-Twyford on “The Most Wonderful Real Estate Podcast Ever” to discuss how tax lien investing offers a pathway to profitable and passive income. With a conservative approach to real estate, Angela empowers her followers through her brand Empower Her Money, focusing on financial strategies that require minimal time commitment while yielding substantial returns.
What is Tax Lien Investing?
Tax lien investing is a little-known method in the real estate world but offers significant benefits to those looking for passive investments. For those unfamiliar, Angela explains the process:
When homeowners fail to pay property taxes, the government auctions off the right to collect that debt to investors. As an investor, you essentially buy the lien and pay the outstanding taxes on behalf of the homeowner. The homeowner then has to repay the government, along with interest, which is guaranteed to the investor. In Angela’s home state of Florida, this can be as high as 18%—an impressive return compared to many other forms of investment.
Angela’s Journey into Tax Lien Investing
Angela’s venture into tax lien investing began after she grew tired of the day-to-day responsibilities associated with traditional real estate investments, such as managing rental properties or flipping homes. Like many investors, Angela was looking for a way to continue investing in real estate without the hands-on maintenance and repairs.
About a decade ago, she came across a book titled The 16% Solution, which sparked her interest in tax liens. This was her entry point into passive real estate investing, and she quickly realized that tax lien investing was a method that not only aligned with her financial goals but also fit her lifestyle. Over the years, she’s refined her strategy and now helps educate others on how to profit through tax liens.
How Does It Work?
The beauty of tax lien investing is in its simplicity and the passive nature of the income. Here’s a step-by-step breakdown of the process:
- Unpaid Property Taxes: When a homeowner fails to pay property taxes, the government needs to recover those funds, which are essential for public services like schools, roads, and emergency services.
- Auction of Liens: The government auctions off the tax lien to investors. The investor agrees to pay the property tax on behalf of the homeowner and, in return, earns interest when the homeowner repays the debt.
- Guaranteed Interest: The investor’s return is guaranteed by the government, and interest rates are often significantly higher than traditional investment methods. In Angela’s experience, states like Florida offer up to 18% interest on tax liens.
- Foreclosure Option: If the homeowner fails to repay the debt within a set period, the investor has the option to foreclose on the property and potentially acquire it for just the cost of the lien.
Why Tax Lien Investing is Ideal for Passive Investors
Angela emphasizes that tax lien investing is ideal for those looking for a conservative, hands-off approach to real estate. Unlike flipping homes or managing rentals, where investors have to deal with tenants, repairs, or even contractors, tax lien investing requires far less time and involvement. Investors can bid on tax liens during an annual auction, then simply wait for the homeowner to pay back the taxes owed.
For Angela, this type of investment fits her goal of earning passive income without the stress of property management. Her strategy focuses on bidding for liens on homestead properties, where the homeowners are more likely to repay their taxes. This minimizes her risk of foreclosure, allowing her to simply collect interest when the taxes are paid.
The Importance of a “Buy Box”
Angela also stresses the importance of defining your “buy box” before diving into tax lien investing. A buy box is a set of criteria that outlines what kind of properties you want to invest in. For Angela, she focuses on homestead properties—houses where the owners live and are more likely to pay off their debt. She avoids properties governed by Homeowners’ Associations (HOAs) and prioritizes areas with steady growth to ensure her investment is sound.
Every investor’s buy box will look different, depending on their goals and risk tolerance. The key is to have a clear strategy that aligns with your financial objectives.
Tax Lien Investing in Action
Dwan, the podcast host, shared her own early experiences with tax lien investing. During her time in Florida, she met an investor who made a fortune by purchasing tax liens on vacant properties. These vacant lots, often considered undesirable by other investors, eventually became valuable as cities expanded. This investor acquired land for just the price of unpaid taxes, a strategy Dwan described as “brilliant.”
Angela points out that while such strategies can be incredibly lucrative, each investor needs to assess their risk tolerance. In her case, she prefers earning guaranteed interest rather than foreclosing on properties. However, for those who don’t mind the potential for property ownership, buying tax liens on vacant land or distressed properties can be a path to long-term wealth.
The Auction Frenzy: A Real Estate Pitfall
Dwan Bent-Twyford, known for her competitive spirit, recounted her experience at an online auction in Colorado. As the bidding intensified, she found herself getting caught up in the frenzy, making decisions she later second-guessed. This is a common challenge for many investors, especially during auctions where emotions can take over rational decision-making.
Angela Duncan shared a crucial piece of advice to avoid this pitfall: hire someone else to do your bidding. “If you know that you’re prone to emotional decisions, it’s better to have someone else handle the bidding process,” Duncan emphasized. By removing yourself from the heat of the moment, you ensure that decisions are made based on logic, not emotion.
Setting Boundaries: The Importance of Sticking to Your Plan
One of the most critical steps in auction bidding is setting a strict budget and sticking to it. Bent-Twyford mentioned how she always writes down her maximum bid on a piece of paper and circles it as a reminder not to exceed her limit. However, even with a plan in place, the excitement of auctions can sometimes lead to overbidding.
Duncan acknowledged that the pressure to bid higher can stem from doubts like, “What do they know that I don’t?” This self-doubt often leads investors to overpay for properties. The solution, according to Duncan, is to remain confident in your research and trust the numbers you’ve calculated beforehand.
Understanding Tax Lien Basics: How to Win
For those new to tax lien investing, understanding how the process works is fundamental. Duncan explained that in Florida, tax lien interest rates range from 5% to 18%. The investor willing to accept the lowest interest rate wins the bid. However, she stressed the importance of calculating whether the interest rate you’re willing to accept justifies the potential return.
Some states, Duncan noted, do not offer tax liens but instead go directly through the foreclosure process, where the deed to the property is sold. Understanding the differences between states is critical, as the investment strategy varies widely depending on the location.
Patience is Key: The Waiting Game
One of the often-overlooked aspects of tax lien investing is patience. While tax liens can offer returns with minimal risk, they are not always a quick payout. In some cases, it can take years before a property owner repays the debt. In the meantime, investors have their money tied up, waiting for repayment plus interest.
Duncan pointed out that investors need to weigh whether a long-term hold at a lower interest rate makes financial sense compared to other investment opportunities. This reinforces the need to have a clear strategy and not simply dive into the tax lien market without careful planning.
Research, Research, Research
Before bidding on any tax lien, thorough research is essential. Duncan described her “buy box,” which includes the criteria she looks for when selecting tax liens to invest in. One of her top priorities is to be the first lien holder, giving her confidence that she will be paid back first if the property goes into foreclosure.
In Florida, Duncan uses free online tools provided by tax assessors to check whether property taxes have been paid. By performing this due diligence ahead of time, she ensures she’s targeting properties that meet her investment criteria.
Tax Lien Investing as a Passive Income Stream
Duncan highlighted tax lien investing as an excellent way to generate passive income. It offers relatively low risk because, as long as the property owner pays their taxes, the investor is guaranteed repayment with interest. Even if the owner doesn’t pay, the investor could end up with the property itself, often for much less than its market value.
Bent-Twyford, intrigued by Duncan’s advice, acknowledged that tax lien investing is something she might explore further. Despite being busy with other projects, she realized that the relatively hands-off nature of tax lien investing could complement her current real estate ventures without requiring too much additional effort.
Teamwork Makes the Dream Work
For those looking to break into tax lien investing, Duncan emphasized the importance of building a solid team. Real estate investing, in general, offers countless opportunities, but trying to do everything yourself is a recipe for burnout and missed opportunities.
“Find a mentor, partner with someone who’s been doing it for a while, and stick to one lane,” Duncan advised. By focusing on a single aspect of real estate and surrounding yourself with experienced professionals, you can significantly increase your chances of success.
Conclusion:
Mastering tax lien real estate investing requires discipline, research, and a strategic approach. As Angela Duncan illustrated, auctions can be exciting, but they’re also fraught with emotional decision-making traps that can lead to overpaying. Sticking to a plan, doing your homework, and ensuring you have the right team in place are all essential ingredients for success.
Whether you’re a seasoned investor like Dwan Bent-Twyford or just starting out, the key takeaway from Duncan’s insights is clear: Stay focused on your goals, and don’t let the excitement of the auction block lead you astray. By mastering these techniques, you can turn tax lien investing into a profitable and sustainable part of your real estate portfolio.
Dwanderful is not only a hub for real estate investment resources but also a platform led by Dwan Bent-Twyford, a seasoned real estate investor and podcast host. Dwan offers a range of services, including guidance on real estate investment strategies, property flipping, and tips for first-time homebuyers. As part of her commitment to educating aspiring investors, she provides a free book titled “Real Estate Lingo“, and a paid book entitled “Five Pillars of Real Estate Investing“, offering valuable insights for both new and seasoned investors.
