How to Invest in Tax Liens: A High-Level Guide to Start Investing Today

Real Estate Investing6 min read

Learn how you can experience the benefits of investing in tax liens — including high returns and passive income — in this guide.

Johnpaul Moses
Johnpaul Moses

So, you’ve probably heard the term tax lien… but do you actually know what it is?

Whelp, today is your lucky day, because class is in session!

We’re sharing loads of valuable info all about tax liens and tax liens investing. Yep, you can actually use tax liens to invest in real estate.

Investing in tax liens can result in significant returns for investors… but the process also involves a degree of risk. (As do basically all real estate investing endeavors.)

So, ready to learn how to invest in tax liens?

Let’s get to it!

What Is a Tax Lien?

So, when a property owner fails to pay their property taxes, the local government can place a tax lien on the property. Yikes.

A tax lien is a claim that prevents an owner from selling or refinancing a property until they pay what they owe to the government.

Tax liens investing ensures:

  1. The government gets what it’s owed.
  2. The investor has a chance to earn more through penalties and fees.
  3. Homeowners can get out of a bad situation.

That’s a win-win-win in my book!

How Do You Invest in Tax Liens?

So, when a local government places a tax lien on a property, the government or municipality generates a tax lien certificate.

Tax liens investing involves purchasing that certificate, which includes the amount of back taxes the property owner needs to pay, along with interest or penalties.

Here’s where we come in as investors…

Governments can sell liens to quickly recover the taxes owed. See, when an investor buys a tax lien certificate, they pay the delinquent taxes.

Now you can clearly see why tax liens investing benefits all 3 involved: 

  • the homeowner gets out of their costly property
  • investors can make a nice profit
  • governments issuing tax liens get the money they’re owed

And remember, in return for purchasing a tax lien certificate, you, as the investor, can recover your initial investment, along with the penalties and fees on the certificate.

This happens if the property owner pays everything off by a specified deadline. The period when the property owner can pay the taxes they owe along with penalties and fees is known as the redemption period in tax liens investing.

Some property owners don’t pay what they owe by the deadline. Simply because they just don’t have the funds. And if that happens, investors can then take ownership of the property.

Where & How to Buy Tax Liens?

Kinda interested in tax liens and what they can do for your REI business?

Well, you can start buying these liens immediately.


Tax liens investing requires purchasing lien certificates at auctions — some of these auctions happen in physical spaces, others are online.

The best way to figure out where and when an auction is being held for properties in your area is to contact tax officials from local municipalities and counties. 

Heck, you could even get in touch with the offices of tax officials at the state level.

And of course, you can also do a quick Google search to get started.

Now , there are 2 general methods for tax liens investing at auctions:

  • Bidding down the interest rate, as the lien could go to the buyer who accepts a lower interest rate than others will accept
  • Bidding up the premium one might pay for the tax lien certificate

You need to be strategic when bidding on tax liens… 

For example, while bidding down to a very low interest rate can help improve your odds of winning an auction, accepting a very low interest rate will also have a negative affect on your profits.

How Does a Tax Lien Affect a Mortgage?

No homeowner wants the local government to place a tax lien on their property, obvi. There are several ways that a tax lien can negatively impact a mortgage. 

If, for example, a property is foreclosed on, the tax lien might need to be paid back before the rest of the mortgage. And there’s all this:

  • Lenders may not fully recover their loan amounts if properties are sold to pay off the tax liens.
  • The property owner could be in violation of the mortgage agreement, which requires them to keep making their payments on time.
  • Having a tax lien on the property might make it more challenging for the property owner to be approved for a future mortgage.

Eek, amIright?!

Ok, now that you understand how tax liens investing works, you’re well on your way to becoming a successful investor in this specific niche. 


We think it’ll be helpful for you to know how to start the foreclosure process…

Look, though it can be tempting to start making investments right away, you should research some more about foreclosures before you begin. 

Because if the property owner doesn’t repay the amount they owe, you’ll be tasked with starting the foreclosure process. 

Pros & Cons of Investing in Tax Liens

At this point, you hopefully have much more knowledge about tax liens investing than you did before, which may have you seeing dollar signs… 

Keep that positive energy when it comes time to make your first investments! 

Before that, though, let’s check out some pros and cons of tax lien investing…

Pro: High Interest Rates

Once you begin investing in tax liens, you’ll notice right away that the interest rates are high. While they can vary from state to state, they usually range from 12%–18%, which allows you to potentially make a lot of money, even if the homeowner makes their payments on time.

Pro: Owning the Property

There are times when the homeowner is unable to pay what they owe by the time they owe it. This is where you step in. 

If the necessary payments aren’t made, you’ll be able to take possession of the property and explore a sale that can make you even more money.

Pro: Potentially High Returns

A single tax lien investment can typically earn you anywhere from 8%–30% in returns, which is considerably higher than most investments provide. 

Con: Liquidity Concerns

Even if you do your best with an investment, it’s not always easy to take hold of a tax lien investment to get your money back. In most cases, they don’t convert quickly into cash. 

Con: Research-Heavy

These investments are also research-heavy, which no one wants to hear. But, proper research makes the chances of success much higher. 

For example, knowing when to foreclose means that you can become a homeowner and flip the property for a profit. There’s also a chance that the property won’t be worth much, which is why it’s a good idea to research it beforehand.

Con: Not Passive

This isn’t a passive income strategy that will keep earning you income without asking you to do anything… 

You’ll need to tell the homeowners that you’ve bought the lien. You’ll also be responsible for reminding them that they need to make their payments on time.

And That’s How to Invest in Tax Liens

With these helpful informative nuggets, you should now have a good understanding of tax liens investing. 

This strategy might not be perfect for everyone, but it can certainly add a lot to your REI business. Doing your research is critical!

Now get out there and start searching for the right tax liens to invest in!


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