Tax Lien Investing vs. Note Investing

I get this question a lot:  Mortgage notes are similar to tax liens, right?

First, what exactly is tax lien investing?  

Tax lien investing involves buying tax lien certificates issued by the local government (think Fulton County, for example) when a property owner has unpaid taxes. When a property owner fails to pay their taxes, the local government places a tax lien on the property. They then sell tax lien certificates to investors to recover money from delinquent property taxes. Investors can purchase these liens, thereby paying the owed taxes.

How is that different from mortgage note investing?

Mortgage note investing involves purchasing an existing mortgage from a lender (think Chase Home Finance, for example), becoming the new lender, and collecting monthly payments from the homeowner. Mortgages are usually paid over a term of 15-30 years. This creates a long-term, passive, monthly cashflow for the investor.  If you purchase distressed, second mortgages like I do, you get the passive income PLUS lump sums of cash.

Let’s talk about it:

Investing in real estate tax liens can be an attractive option, but it also comes with its own set of challenges . When I talk with my students that invest in tax liens, these are some of the challenges they face with tax lien investing:

  1. Due Diligence Complexity: Researching and conducting due diligence on tax liens can be complex. Understanding the legal and financial aspects of a property’s tax situation requires thorough investigation, and mistakes can lead to financial losses.
  2. Uncertain Redemption Periods: Tax lien investments are subject to redemption periods, during which the property owner has the opportunity to pay off the outstanding taxes and reclaim the property. The length of redemption periods varies by jurisdiction, and uncertainty about when or if the property will be redeemed can impact returns.
  3. Property Condition Risk: Investors may not have the opportunity to inspect the property before purchasing a tax lien, exposing them to the risk of acquiring properties with significant maintenance or structural issues.
  4. Legal Challenges: Dealing with legal procedures, foreclosure laws, and potential challenges in the court system can be time-consuming and costly. Legal complexities may arise during the foreclosure process, and investors need to navigate these challenges effectively.
  5. Market Volatility: Real estate markets can be unpredictable, and the value of a tax lien investment may be influenced by broader economic conditions. Fluctuations in property values can impact the profitability of tax lien investments.
  6. Competition: As with many real estate investment strategies, competition among investors for tax liens can be fierce. This can lead to lower returns or make it more challenging to acquire desirable tax liens.
  7. Redemption Premiums: In some cases, property owners may redeem the tax lien by paying off the delinquent taxes along with additional fees and interest. This redemption premium can impact the overall return on investment for the tax lien holder.
  8. Limited Control Over Property: Until the foreclosure process is complete, tax lien investors have limited control over the property. This lack of control can be a source of frustration, especially if the property requires urgent attention or maintenance.
  9. Lack of Income Generation: Unlike some real estate investments that generate regular income, tax liens may not provide immediate returns. Investors may need to wait until the redemption period expires or the foreclosure process is completed to see a return on their investment.
  10. Risk of Default: There is a risk that property owners may default on their tax payments even after the tax lien is purchased. This can lead to prolonged legal processes and additional costs for the investor.

No doubt, tax lien investing can be lucrative, however, when compared with mortgage investing, there are some key differences:

  • Simple 6-step process for due diligence
  • No redemption periods or property condition risks (we’re buying the mortgage, not the property)
  • No legal challenges. Note investors primarily want cashflow, not property. Just like the banks!
  • Mortgage notes are a hedge agains market volatility and are not impacted by market fluctuations. 
  • No competition. Note investing is still the best kept secret in real estate!
  • 10-30 years of passive, monthly cashflow.  Income is unlimited, buy as many notes as you want.

One thing tax lien investing has in common with note investing is this:  Risk of default. 

As you know, bad things can happen to good people. This may result in a homeowner falling behind on their mortgage payments.  The great thing is that YOU are in a position to be able to help them because YOU own the mortgage!  Most often note investors will rework the loan so that the homeowner can get back on track to paying. This is a blessing for both of you!

To your success! 🥂

Daphne