Items you will need
Tax Liens have become the dream choice of many investors. Why? Because there is virtually no risk. Tax Liens are property taxes that an owner has failed to pay. The good thing about tax liens is that you do not need a lot of money to get started. Having said that, do some research if you want to make a good go at it. There are tons of courses available, but they will run you in the thousands, which may defeat the purpose if you only have $1000 to invest.
First Things First
Research: If you go in blind, you will fall in a hole. We know that there are 50 states, and all of them have their own way of doing things. Some are tax deed, while the rest are title states. California gives you the title, while Florida gives you a deed. Let's go through this by looking at some real examples. Go to https://training.taxsale.com/ . This is an online tax lien demo site in Duval county. Although online is not the best way to invest, I just want you to see some of the information. The reason that online is not the best way to invest in Tax Liens is because more people are bidding and that means a lower rate of return. The county has a tax owed of $500. The interest rate normally is 16%. At an auction, the job of the seller is to get you to buy it for the lowest interest, so the county pockets the rest when it is paid off. For our purposes, lets say you agreed to 5%. The county would get the other 11%, because the property owner still owes the 16%.
Start in your County or State, if possible, if you want a Tax Deed. In California, it can be a nightmare, because it is a Tax Deed state. That means you are getting property. Los Angeles does not sell Tax Liens, but the actual property. If you want property for pennies on the dollar, then this might be good. They hold an auction twice a year. You have to have 10% or $5,000 as a deposit in the form of cash or a cashier's check. You can visit: http://ttc.lacounty.gov/default.htm to check out property if that is what you are interested in. Please know that you are not putting anyone out on the street. For the most part, houses that are past due on tax are generally vacant.
Branch out to FL (18%), AZ (16%)or others for actual certificates and high interest: Here, you are not buying the property at a reduced cost, but actually paying off the tax owed to the county. When the owner pays the past due, they are assessed penalties, and you get it all with interest, unless you bought the tax lien for a really low interest rate at an auction. The owner owes $1,000 at 16% + penalties (let's say $35). At minimum your return will be $195 even if they paid the bill the day after you bought it. If they fail to pay within the designated redemption period, which is two years in FL and three years in AZ, then the property technically is yours, but you do have to do a lot to make sure all rights have been honored.
Start in small amounts: Yes, compounded interest looks good on a $3,000 tax bill if you are looking for a return, but the reality is it might be smarter to have $500 invested in 5 properties instead of one at $3,000. The logic is simple. You will be getting a check often as opposed to once. You can then turn around and reinvest that amount quickly. Another reason is that the higher the tax bill the more likely it will be scooped up by a bank or conglomerate who has a vested interested in that property. If you wanted to pay the amount he owed then he would have had to pay you, but a bank stepped in to make sure you could not buy it.
Protect yourself: Many individuals protect themselves by setting up a (Limited Liability Company) LLC. It is this entity that is the actual investor, so it protects you in case of retaliation. This is especially useful if you are actually looking to acquire homes as opposed to the interest and penalties.
Reinvest your initial investments: Whenever you get a check in the mail showing that a tax bill has been paid, you need to reinvest that initial amount into another property. The wealth is made from the interest and penalties you are accumulating.
Increase Your Investment: If you want to maximize your wealth you will eventually have to increase your investments. you should start low and slow in order to learn what you are doing. Now that you are more solid footed, there should be nothing to keep you from doing a $5,000 investment in tax liens. I would still use the principle of more for less because it does not tie up all your money in one property.
Attend seminars: Donald Trump Institute does free seminars on real estate, but one segment was on tax liens and it was actually really informative.
Start within your own county or state. Start small with $500 in various properties (ie, 5 x $100).
Don't buy without knowing what it is you are buying.