Real Estate Investing

What is Tax Lien Investing?

Tirios Team

January 24, 2023

It is well said that ‘landlords grow rich in their sleep.’ The demand for buying and selling property remains no matter what the circumstances are. You must have heard that real estate investment is one of the best ways to make money in the United States. Tax liens are an excellent way to diversify a portfolio if the investors are savvy and invest safely. 

As knowledge is the key to success in any investment, investors can profit from tax lien investing through interest payments or property ownership. There are tax lien states where investors pay the property tax and earn interest; many states in the U.S. are the best for tax lien investing. Let us read further to learn more about tax lien investment.

Is investing in tax liens a good idea?

The government files a tax lien on a property when taxes are past due. Tax liens include real estate, personal property, and financial assets. Tax-lien investing means buying tax-lien certificates. 

The certificate is issued once a tax lien goes unpaid for a set period. The tax lien certificate shows how much the property owner owes in unpaid taxes and any penalties due. One possible way to invest in tax lien certificates with less risk is through tax lien investment funds.

Yes, Tax lien investing could be intelligent as some states can offer higher interest rates. Investors who already have a diversified portfolio and sufficient capital to invest can select tax lien investing. 

Following are some positive notes about tax lien certificates.

  • The tax lien certificates are safe because the investment is made directly with the local government.  

  • The tax lien certificates pay high returns, and how much the interest rates paid on tax lien certificates will come from the government.

  • The tax lien certificates are secured by real estate. The property is given to the certificate holder if the homeowner does not pay or repurchase and redeem the tax lien certificate.

  • The tax lien certificates are for small investors who can start with a few hundred dollars and for big investors who can make significant investments such as $100,000. 

Is tax lien investing ethical?

Tax liens have been available for investment for over 200 years and are legal in all states and counties in the United States. The tax lien states also give the delinquent property owner notice of default. But, the tax lien county treasurer issues a certificate on the property that is delinquent on taxes.

What is the best state to buy tax lien certificates?

According to "The Balance," an online magazine for investors, Florida is an excellent state for tax lien investing. Tax lien investing is safer than the stock market and delivers solid returns. Ted Thomas is America's leading authority on tax lien certificates. According to him, Florida is viewed as an attractive state to buy a tax lien certificate because lots of undeveloped properties there become available at auction.

Tax lien investing for beginners

There are many tax lien investing books available in the market. Also, people can take help from a tax lien investing course to start safely investing in real estate, get returns guaranteed by law, and find the best properties for property deals. For example, Ted Thomas, recognized as the Tax Lien Certificate Authority, has helped people through his video and article on tax lien investing for dummies.

Below are the steps mentioned in tax lien investing for beginners. Let us have a look.

Step 1: Gather Knowledge about tax liens and real estate auctions

A tax lien is purchased at a real estate auction; therefore, take the time to understand the process before attempting to bid on any tax liens.

Step 2: Decide On A Target Area

Narrow down a target area to focus your tax lien investing activities, as the tax liens are assigned by county in the U.S. Check out public records to find the financial status of counties and the types of properties for which tax lien certificates could be available.

Step 3: Check Different Properties

Auctions prevent buyers from seeing the inside of a property before the sale. Hence, you may need to be aware of the property's condition. Therefore, it is essential to do your homework and scout out potential properties before you attend an auction. The properties could be single-family homes, rental properties, land, or commercial/industrial buildings.

Step 4: Make A List And Bid 

Now, you can attend a real estate auction and place a bid on the property you are interested in; research the county's payment requirements and be prepared if your bid is accepted. If you win the bid, you will have the ownership interest in the property and the lien.

Step 5: Notify the Homeowners

Follow the area's laws after obtaining the tax lien. For instance, the law requires you to notify the homeowners by sending a certified letter to the property. The letter will state that you bought the lien and state how much they owe back taxes on the property. 

Step 6: Collect Your Money or Property

Once all parties understand the lien agreement, collect interest as the homeowners make back payments. If the homeowner does not make the payment, the auction winner becomes the lien holder and, ultimately, the homeowner. 

Best states for tax lien investing

A tax-lien Investor can purchase the tax-lien certificates from the issuing tax authority. The tax lien certificate allows the investor to collect interest owed on the tax debt. The best states for tax lien investing offer reasonable interest rates and a short-term redemption period.

Let us look at some of the best states for tax lien investing. 

1. Alabama is a tax lien certificate state with plenty of sales. The interest rate is fixed at 12 percent, and the winning bid is whoever pays the most for the property, and interest is earned on the property taxes. 

2. New Jersey is an excellent state to invest in tax liens because the laws state that investors cannot buy a property once it is under tax foreclosure unless the homeowner redeems the taxes first. The interest rate is 18%, and a two-year redemption makes the state competitive.

3. Arizona is one of the best states to invest in tax liens. Every year in February, Arizona holds tax lien auctions. You can buy tax liens in Arizona by bidding down the interest you will accept. The interest rate starts at 16%.

4. Colorado sells tax liens, and the interest rate is 9% over the prime rate, so it varies. The highest bidder gets the lien. Colorado lets people pay more than the amount of past-due taxes. Some Colorado counties have in-person auctions, and some have online sales. 

Tax Lien Investing Pros and Cons

Tax liens are common investments across the United States, and purchasing tax lien properties is the same as purchasing and selling properties at an auction. 

Following are the tax lien investing pros and cons:


Property tax lien investing has a much lower risk profile than other forms of investing. The rules and guidelines regarding tax liens are different in different states.

  • Interest rate returns: Investors can profit from tax lien investing from homeowners' interest when paying delinquent tax bills. Interest rates can depend on where you live. Also, some areas have interest rates as high as 18 percent.

  • Steady Returns: Investing in tax liens will provide you with a fair standard rate of return. With tax lien investing, you have a solid understanding of your return.

  • Low capital requirement: Tax lien certificate investing offers a much lower capital requirement for as little as a couple of hundred dollars.

  • Potential to Obtain Real Estate: Investors can obtain a new property for their real estate portfolio without paying its market value. If the homeowner cannot pay the taxes that prompted the lien, the lien holder can trigger foreclosure proceedings and claim the property. If the property owner does pay the taxes, they will still profit in the form of interest, making it a win-win situation for the tax lien investor.


Tax lien investments can be high tax yield investments, but sometimes investors could be caught in the crossfire of complicated rules and loopholes.

  • Tax lien investing requires research: Individual investors considering investments in tax liens must do thorough research about the properties. An investor must check out the property and all liens against it, as also recent tax sales and sale prices of similar properties.

  • Expiration dates: Many Tax liens have an expiration date after the end of the redemption period. Once the lien expires, the lienholder cannot collect the unpaid balance. 

  • Local Jurisdiction Laws: The laws around tax lien investing vary across states, allowing investors to participate in a tax lien sale. Hence, consulting a legal counselor familiar with real estate investing is essential to help you avoid mistakes.

  • Competition: There is massive competition in tax lien sales from money managers and fellow investors to purchase tax liens. Therefore, a way to win from the competition is to know your target market well and target low-cost liens—in the $100-$200 range.

Tax lien certificate auctions are competitive. The best certificates will sell quickly if institutional investors want to invest in tax liens in a particular area or for a specific property type. 


Though there are risks involved in tax lien investing, for an active investor who likes to chase the challenge of figuring out a solution to whatever comes up, there may not be a better investment than tax lien investment, especially right now in the U.S. Therefore, research on the list of properties that are of interest and utilize resources to learn about the property's history, neighborhood and surrounding communities.

This information is brought to you by Tirios team. Tirios is a real estate investing platform focused on making real estate investing work for everyone. With Tirios, you can invest in multiple properties, which helps diversify your portfolio across different cities and hence, a convenient way to grow your real estate portfolio. Join Tirios today!


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