Monday, February 21, 2011
The Only Safe Way to Play Real Estate
Real estate investing has built numerous fortunes over the years. Stocks and bonds have also built fortunes. The key to making money is buying low and selling high. It's a pretty simple formula. However, you must know when something is a bargain.
Real estate has dropped 40% in some markets. Is it cheap now? I don't think so. In fact, I believe it'll go down another 30% before it's all over. However, in 2005 a 40% discounted property would have looked like a steal to most.
So, especially in this housing market, when I say cheap, it had better jump up and grab my attention. I'm talking 60%, 70% or even 95% discounts to their current price. That's cheap!
I'm guessing you're earning 1% or less in your bank account. Whatever it is, it's pretty paltry. Perhaps only a few nights out, and this money will be gone forever.
Not a big deal, right? Wrong. Not paying attention to the small things will sink you financially. Never ignore money, no matter how small the amount. These seemingly small amounts will accumulate, over time, to build your legacy.
We've discussed the insatiable appetite our government has for cash. We've demonstrated how you can lend to your municipality through municipal bonds and pick up nice tax-exempt income.
However, there is a little-known lending opportunity that will pay you up to 18 times, or more, of what the bank is offering. In fact, the norm is around 10% or 12% on every dollar you're willing to lend.
The choice is straightforward enough. Keep your money in a bank CD and hope for 1%, or lend it to your county and pick up 9%, 10% or even 18% in one year.
You can guess where my money gravitates.
The investment that we'll be looking to exploit this month is called a Tax Lien Certificate (TLC).
In the simplest terms, a tax lien certificate is an obligation of a property owner, generated by the county, against a piece of property that has failed to pay taxes.
Taxes are the lifeblood of municipalities. Doing without even a small amount is not a very appealing option. To remedy their desperate need for cash, they place a lien on someone's property for the taxes owed. Counties then sell the tax lien certificates to the public at auction.
In effect, you loan the money to cover the taxes for the property owner, in exchange for the right to be repaid, with interest, once the property owner pays his taxes.
The beauty of this arrangement is the county does all the hard work. They identify the property, they send notices to the delinquent property owner, they collect penalties that become your interest once the owner decides to pay. You simply have to wait up to a year to collect your interest. Exactly like a one-year bond.
This last step needs a little clarification. You could be paid very quickly or in a year. However, if you're fortunate and end up with a piece of property, there will be some additional expenses.
You need to begin thinking as a banker when looking at bonds. The tax lien certificate should be examined the same way. In fact, you very much ARE the banker in this scenario. What we are presenting would be a simple way to begin a lending business of your own without any of the red tape and federal oversight of a real "brick and mortar" bank. Your returns will be better as well.
In effect, you are the bank by lending the county, and the tardy taxpayer, the money due. What would make you do such a thing, apart from being such a noble character in general? The penalty that we get to keep once the taxpayer decides to find the cash. All the county fees and expenses are also rolled into the tax lien certificates, so the county gets paid today (with your money) and you'll get paid in a year, plus at a market-smashing 10% or higher.
If the owner doesn't pay, you end up with his property. It is this off chance at the taxpayer not repaying that causes me to label these as real estate investments. They are more like a bond or loan than anything else, but it's the high return, plus the chance at a giant return, that keeps me coming back.
I've been using 10%, because if I began with other numbers you may not believe me. Illinois, for example, pays up to a whopping 36%. Some states charge the full penalty, what we are calling interest, whether the person pays his taxes the first day delinquent or on day 365. In other words, if you're in a state that allows this, and you are paid 10% after two months, annualized that's a 60% return on investment.
Each state is different and each county within a state has different procedures. For example, Missouri pays 10% annually, but holds the auctions only once a year on the fourth Monday of August. However, each county sets their own policies. Some require cashier's checks and some take credit cards or personal checks.
It is the odd differences among counties and the relatively small dollar amounts that drive away the big institutional investors and open the door for you and me.
I've harped on this a lot, but homework is always required on any investment. If you don't do the necessary work, even the simplest wealth-building techniques will bite you. DO THE HOMEWORK.
Every state publishes a list of tax lien properties prior to the auction. Some even publish guides to their sales. It's your job to get this list and guide in preparation for the auction.
Your first step is to review the list of tax lien properties available. Tons can be found online at your county's website. Look under the "Collector's Office" or "Treasurer." Every county has them. They may say "tax lien certificate," "tax deeds sales" or "tax land sales." All three represent tremendous opportunities and are very similar. We'll touch on the difference briefly, but for our purposes here, we'll stick with the tax lien certificates.
A neighboring county had a list of nearly 200 properties. The range in taxes owed was anywhere from a couple of hundred dollars to $12,000 or so.
The properties on which the lien was placed ranged from tiny, undeveloped lots to 65 acres of prime real estate.
Now remember, you're lending to the county and to an individual. The county keeps the money nomatter what happens. The individual has two choicesof repayment. He can pay the taxes owed to the countyOR he can do nothing and forfeit the property securing your tax lien certificates.
And this is where things get really exciting.
You see, you can, quite literally, buy a tax lien certificate for a few hundred dollars and end up with a property worth a few thousand dollars, or even tens of thousands of dollars, a year later.
You read that correctly.
More homework: With every investment you must investigate and identify the possible downside. The downside to this could be that there are other liens against the property. A federal lien would take precedence over mine. Mortgage liens probably won't come ahead of my county tax obligation, the TLC, but I don't want a fight. There could even be a mechanic's lien.
This is the key item for which you must research prior to bidding on any property. You must check if there are liens against the potential property.
A title search will cost you $150 and you may not even win the auction.
However, counties allow access to any recorded liens against your potential investment (yes, more homework). Fortunately, many counties are online and you can do most of the work yourself. Twenty years ago, you'd have had to go to the county and dig in. I was fortunate that my county had everything online. It's not a guarantee that there is not some type of problem associated with the property, but it's an excellent start.
The downside? I can't see any. Either I make $37.70 or my tax lien certificate will increase in value by approximately 695% when I acquire the property. That's a pretty big margin and if this happens, you've hit the long ball in the worst real estate market of the past 40 years.
Seeing value where others won't is what wealth building is all about.
Editor's Note: Joseph McBrennan also knows what commodity you should be buying INSTEAD of gold… it might sound crazy, but there’s another commodity out there even better than gold. It’s not oil, silver or platinum. In fact, you’ve probably never thought about buying a single ounce of this…
But if the market collapses, it could be even more valuable to you than gold. Find out what this commodity is today from Joey's service, Wealth Legacy Advisory.
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