Tax lien investing can be a great way to diversify your investment portfolio and make some extra money. The popularity of this type of investing has grown over the years, and it’s easy to understand why. Many people have been attracted to investing in tax liens because of their high potential returns, low risk, and lack of competition.
Tax lien Investing has pros and cons, but do your homework before investing. There are a lot of risks involved, but if done correctly, you can make a substantial return on your investment.
Here are the pros and cons of tax lien investing:
Pro: High Potential Returns
Tax lien investing can offer returns of up to 36% or more in some cases, making it one of the higher-yielding investments you can make. This means you can earn a much higher return on your investment with less risk than other investments. Tax liens can be a great option if you’re looking to boost your returns.
Pro: Low Risk
Tax lien investing is a low-risk form of investing. The government backs the Ontario tax sales, so there’s no worry about defaulting on your investment. This makes it an attractive option for people who want to minimize their risk while still having the potential to earn a good return.
Pro: Low Competition
Investing in tax liens can be a great way to enter an investment arena with low competition. Since most people don’t know about this type of investing, there is less competition for the available liens. This means you have a better chance of getting good deals and higher returns.
Pro: Secured Investment
Tax liens are secured investments, meaning you invest in something backed by a government agency. This means you can rest assured that your investment is safe and secure. Your investment should be safe if the government agency is in good standing.
Pro: Passive Income
Tax liens are a great way to earn passive income. Once you’ve purchased a lien, all you have to do is sit back and wait for the interest payments to come in. You don’t have to manage your investment or worry about anything else actively.
Con: Low Liquidity
One of the downsides of tax lien investing is that it’s not very liquid. You may find yourself stuck with your investment for a long time because it can take months or even years to find a buyer for your lien. This means you may not be able to access your money when needed.
Con: They Come With an Expiry Date
Many tax liens have a predetermined expiration date, meaning you cannot hold onto your lien indefinitely. You must know when the lien expires, or you may lose the investment. Even if you can find a buyer before the lien expires, you may still be stuck with some selling costs.
Make sure you know when the lien expires so that you can either plan to collect your money or find a buyer before it does. Consider your risk tolerance and understand the risks of investing in tax liens.
Con: High Fees
Investing in tax liens can be costly. Many places charge fees to purchase the lien, and you may also have to pay for title searches and legal fees when it comes time to collect your returns. You may not make as much money from your investment as initially thought.
Understand what kind of returns you are likely to get from your investment so that you can make an informed decision. Ensure you understand all of the associated costs before investing in a lien so that you can factor them into your decision-making process.
Con: Difficult to Research
It is essential to thoroughly research the local laws and regulations in the province where you are investing. This will help ensure that your investment is sound and you know what to expect.
Researching potential tax lien investments is not as easy as it may seem. You will need to be familiar with the laws in the province where you are investing, and you might have to consult an expert if you don’t understand some of the finer points of the investment. This can cost time and money that could be used for other investing activities.
Con: The Property Owner May Never Redeem the Lien
Finally, there is always the chance that the property owner will never redeem the lien. In this case, you could end up with a lien with no value and lose your investment. This makes it essential to research before investing in tax liens to minimize risk.