Lets make some state comparisons in terms of tax lien interests.
Compare the two:
At 3.35% per annum, that $2,000 we referred to before, when compounded quarterly, would grow to $3,897.58. In 20 years, it doesn’t even double in value! What if you had put that $2,000 into a tax lien certificate at 15% per annum? In 20 years, it grows to $38,025.81. The tax lien returns 10 times as much as the bank account, even though the interest rate is only 5 times higher. Why? That’s the power of compounding your interest. Remember that it’s time and rate of return that determine how much you get back.
Let’s take it a step further. We mentioned $2,000 as a figure because the IRS allows you to put that amount into a tax-deferred Individual Retirement Account each year. There are a variety of account types you can use, including IRA, SEP-IRA, Roth IRA, you company’s 401-K plan, a self-employed plan (i.e., Kehoe), or a corporate pension or profit sharing plan. If Jim puts his $2,000 into a bank account at 3% and Suzy puts her $2,000 into tax liens at 16% each February over a period of 20 years, they realize wildly differing results:
Jim at 3% per annum
Suzy at 15% per annum
|After 20 years = $55,352.97||After 20 years = $267,681.01|
|After 25 years = $75,106.08||After 25 years = $578,176.53|
|After 30 years = $98,005.67||After 30 years = $1,230,323.2|
Take a minute to think. What would you rather have in your retirement account, less than $100,000 or over a million dollars! In the long run, the level of return you get from investments matters. It matters a lot.
The returns come quickly!
Let us return to the example of a state that allows a 16% on tax lien certificates. If you purchased a lien on February 21, 2002, and that certificate were redeemed the following Monday, you would be entitled to 2.67% worth of interest. In four days, you made as much as a bank would have paid you for holding onto your money FOR AND ENTIRE YEAR!
The “Rule of 72”
How long will it take you to double your money? A simple calculation known as the rule of 72 will tell you. You divide 72 by the rate of return you are getting, and the result tells you how many years you need. For example, if you put your money into a bank certificate of deposit at 6% and keep it there at the same interest, in 12 years you have doubled your money. Your $5,000 has grown to $12,000. On the other hand, let’s say you put that $5,000 into a tax lien that returns 16%. After only 4 years and 4 months, you have your $10,000. At 24% interest, you double your money in only 3 years!
72 ÷ 24 = 3 Years
Investing in tax liens pays, no matter where you do it!
Each state creates its own laws governing what investors receive from tax liens. Most pay an attractive interest rate on certificates.
Here are a few examples:
Investors in Arizona tax liens receive 16% on investment. The state code reads:
A. Except as provided in subsection B, all taxes bear interest from the time of delinquency at the rate of sixteen per cent per year simple until paid. A fraction of a month is counted as a whole month.
B. Interest shall not be collected:
1. If the delinquency is the result of an error by the county assessor or county treasurer;
2. If the full year tax for the year is paid on or before December 31 of the tax year. (42-18-53. Interest on delinquent taxes; exception
Returns are even more in Florida, standing at 18% per annum. Here we read:
(1) Real property taxes shall bear interest at the rate of 18 percent per year from the date of the delinquency until a certificate is sold, except that the minimum charge for delinquent taxes paid prior to the sale of a tax certificate shall be 3 percent.
In the Hawkeye State, investors collect as much as 24% per annum. Here’s the statute:
24% annually, more specifically an “interest of two percent per month, counting each fraction of a month as an entire month, from the month of sale, and the total amount paid by the purchaser or the purchaser’s assignee for any subsequent year, with interest at the same rate added on the amount of the payment for each subsequent year from the month of payment, counting each fraction of a month as an entire month. The amount of interest must be at least one dollar and shall be rounded to the nearest whole dollar. Interest shall accrue on subsequent amounts from the month of payment by the certificate holder” 447.1.
Notice that the interest is calculated monthly, or any fraction of the month. In other words, if you buy the lien on the 30th of July, and the homeowner pays you back on the 2nd day of September, you earn 4% (i.e., 2% per month), even though you held the lien only 34 days. In 34 days your return beats what a bank pays over 340 days, with equal safety and security!
Some states pay as much as 15% per annum plus a 3% penalty return at redemption. That penalty is paid regardless of how soon redemption is made after purchase the lien. If you are fortunate enough to receive payment in a couple of months, that 3% flat-rate penalty becomes a double-digit return on top of the 15% per annum you earned.