Using Your Self-Directed IRA to Invest in Tax Liens
Investing in tax liens with a self-directed IRA can help diversify your portfolio. Tax liens are a lesser-known and under-appreciated method of alternative income but are one of the many sound investments you can make with your IRA. Tax liens are one type of investment that can be owned inside of an IRA, and are considered a safe, lucrative, and generally small-dollar investment with a higher rate of interest. Below, we are going to discuss how you can use your Self-Directed IRA to invest in tax liens and some benefits of doing so.
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What is a Tax Lien?
A tax lien is a legal claim that is placed on someone’s property as a result of the owner being behind on property taxes. Tax liens are senior to other liens placed on a property, which means that is the municipality responsible for placing the legal claim on the real estate forces liquidation, the tax lien must be satisfied before other claims. Tax liens and tax deeds are then sold by the county at a sale or auction. Each state holds these auctions a bit differently, but in all cases, the tax deeds or tax liens can be purchased within a Self-Directed IRA. Buying tax lien certificates can be a great opportunity for most investors, as the strategy is simple, the returns are great, and they are guaranteed with real assets.
How Does it Work?
Like any other IRA, you open and fund your account and make your investment. Funds from the IRA are then used to purchase the tax lien from the county. An official document issued by the legal jurisdiction that is responsible for issuing the lien on the property is necessary. Having this document grants an investor conditional ownership of the property’s title in the case that a tax sale happens.
Absolute Deed
This legal document provides the holder with ownership of a property without restrictions, conditions, or encumbrances. An absolute deed can also be called a deed absolute.
Encumbrance
An encumbrance is a legal claim on a property, like a mortgage.
How Do Investors Profit On the Investment?
The owner of the property could redeem the tax lien, which means that they would repay the full lien amount, plus any interest and penalties, to your IRA. If the owner doesn’t pay the lien and interest within a certain amount of time, your IRA could have the right to foreclose and receive the deed to the property. Investors can then sell the property for whatever price they can obtain in the real estate market.
Benefits of Tax Lien Investing
High Interest Rates
High interest rates are usually enough to scare people off, but if you are on the other end of the spectrum, it is the kind of phrase you want to hear. Collecting higher-than-normal interest rates means that you can get returns on your investment that are generous and well worth your time and effort.
Potential Takeover of the Property
As stated earlier, if the individual with the tax debt cannot pay the bills, it may lead to foreclosure, meaning that the investor can decide whether they want to sell the property for a profit or simply retain the property and enjoy the income generated by renting the property out.
Passive Investing
While there is plenty of homework that goes into identifying a good tax lien opportunity — not to mention, you’ll want to make sure that you have all of the assets you need to make such an investment — tax lien investing can be highly passive. When your Self-Directed IRA purchases a tax lien, you’re then free to sit back and let the local tax collector deal with the profits for your Self-Directed IRA. You do not have to leave letters or knock on doors; you can simply wait for the interest rates owed to you to come in.
Final Thoughts
It is important to let your custodian or administrator know that you are utilizing your Self-Directed IRA to make an investment in tax liens. Be sure to do the necessary research required to make an investment such as this, and build a solid support team so you can continue moving forward with confidence.
If you are interested in exploring the options you have for a Self-Directed IRA, then contact the non-recourse loan lenders at First Western Federal Savings Bank. Our team can walk you through how you can leverage your SDIRA with a non-recourse loan to invest in real estate, which can be an extremely lucrative investment. Contact us today to learn more.