Today’s REI Classroom Lesson

In today’s lesson, Bob Diamond elaborates on how tax liens can provide passive investments.

REI Classroom Summary

Bob Diamond goes over how tax liens work, including tax benefits and what happens if payment isn’t made on the property.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Bob: Hi, this is attorney, investor and educator, Bob Diamond, and I’m here to talk to you today about tax liens, which to me are the number one passive profit investment available in America today.

Mike: This show is sponsored by PassiveRental.com.

Bob: Tax liens have incredibly high interest rates. The interest rates of the stated interest can go as high as 36% and there is even one state where they give you as the investor, up to 50% in the form of penalties that you get paid when you buy a tax lien and wait for it to get paid off. And can you imagine at 50% a year? And I’m even going to show you at the end, a way that you could do that completely tax-free. You can pick 50% a year tax-free, no money taken by the tax man. Pretty incredible. So hang in there. I’ll tell you about at the end.

Tax liens are really interesting because you can invest as few as a couple hundred dollars or as many as millions of dollars, depending, of course, on how much you have to invest, and how much you want to deploy into this area.

The investment is passive. Since you own a lien against the property, and not the property itself, you don’t have to worry about cutting the grass, you don’t have to worry about fixing the roof when it leaks, you don’t have to worry about overseeing contractors. Completely passive investment, which is really fantastic.

And your investment is backed by real estate. I think you could think of this as similar to being a mortgage company, where you have a first mortgage against the property and the mortgage supports the investment, and frankly if they don’t pay, then you can get the property and get all your money back anyway.

What’s interesting about tax liens and tax deeds is you can actually have a tax lien at maybe $300, maybe $3,000. It could be secured against a property that’s a hundred thousand, $200,000 or even $300,000. And let’s face it, if the person doesn’t pay you with their $100,000 property and you’re owed $1000, you’re getting your money back in the event that they don’t pay you back. And in some jurisdictions, believe it or not, the taxing authority will actually just give you the property if they don’t pay you.

So occasionally, you’ll get a grand slam home run where you made by a tax lien for $1000 and end up getting $100,000 dollar property as a result of that, completely free and clear of any liens. Can you imagine that? Pretty amazing.

And there are strategies you can use, depending on whether you want an investment for yield, maybe you want interest rate and penalties like the 36% or 50% I was just talking about, or you can use strategies where you get properties that are less likely to redeem, meaning they’re less likely to pay you off, and then you just get the property. And again, occasionally, you’re absolutely going to get a grand slam home run deal. But you can control that by looking at the property itself and looking at the lien.

A little more involved than I can get into now, but there are strategies if you get into this business that you’re going to find where you can make it much more likely to get the property if that’s what you want.

But here’s the tax secret that I just think is phenomenal. So normally, when we pay taxes in America, we’re paying anywhere from a third to half of our income, depending what taxing jurisdiction you’re in and how much money you make each year. That is a big drag on an investment portfolio. You know, if you make $1000, you have to give $500 to the government. Brutal. And even if you make $1000 and you have to give them $333, absolutely brutal.

But you can use something called a self-directed Roth IRA to invest in tax liens. And get this. And don’t tell anybody. You never have to pay taxes on your profits ever. You can make 50% and never pay taxes on your profits.

Remember Mitt Romney was running for president, they were going on about how he built a $100 million portfolio tax-free? Well, he did it with the Roth IRA. And the Roth IRA is something you definitely want to learn more about because it’s for passive investments only, like tax liens, not for active investment like house flippers. But for passive investments, you can actually earn your profits 100% tax-free. Pretty amazing.

So all 50 states hold sales of either tax liens or tax deeds. Tax deeds are where they give you the property. Sales are held in every county in America at least once a year. In big counties, like if you’re talking say Phoenix, Arizona, which is Maricopa County, they hold sales monthly because they have such a high volume. They have to.

So check out your local tax lien and tax deed sales and learn about this really lucrative area of investing because it really can be the source of the most incredible deals. And even if you’re not getting the property, the most incredible yields on investing, I mean, better than putting it in your bank at 2% on an IRA. That’s for sure.

So this is attorney and investor, Bob Diamond. I hope that you will go and check out tax liens and tax deeds and learn about this amazing and interesting area of real estate investing. So I will see you next time and see you next time from the REI FlipNerd.

Mike: PassiveRental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit PassiveRental.com, to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today, and get started by visiting PassiveRental.com.

Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.

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Bob Diamond is a practicing real estate attorney and investor with years of experience in real estate law, investment, development and is the author of three books on real estate investing. You may be familiar with Bob from his appearances on FOX, NBC, CNBC, NPR, or the Flip That House television show on TLC. Bob graduated from Villanova University with a degree in Finance in 1987 and from Temple University School of Law in 1993. He became a Pennsylvania licensed attorney in 1993. During his career outside of real estate and law Bob worked for Meridian Mortgage in their default and REO department, for Arthur Anderson and Coopers and Lybrand as a business consultant, and for the international law firm Cozen O’Connor as a real estate attorney. For his own account Bob has been investing in real estate for over twenty years and has participated as the buyer, seller, or attorney in over one hundred million dollars in real estate transactions over the past twenty years. Bob has been teaching real estate investing since 1999 so you have probably heard of Bob in the investor world where he is known as the ‘guru’s guru.’ Because of his legal expertise and experience as a real estate attorney, Bob is sought after for his advice and counsel.