Investing in tax-sale properties is an excellent way to diversify one’s investment portfolio. The government recoups these properties from homeowners who have not paid their property taxes. They are then purchased at auction or public tender, paying far less than the property’s assessed value and the outstanding taxes and fees.
Here is how to make money from tax sale investments and maximize your returns.
Review Tax Listings
Comb through tax listings carefully. If you know your exit strategy for making money from a tax sale, you should know within a couple of minutes whether a given property is worth investigating further or isn’t worth your time.
Know the Market Value
Get the market value for every potential property you want to bid on. A property with a minimum bid amount far below market value can soar when the competition gets hot. If you bid closer to and above market value, this eats into your resale profits.
Be Ready to Make Repairs
The property condition is uncertain. You buy a tax-sale home as-is without ever walking inside. This means you must be ready to make some repairs. Contact contractors or learn some skills yourself to make the repairs or renovations. Set aside a budget to make the repairs.
Protect Your Financial Stability
It cannot be said enough to protect your financial stability in tax sales. Bid according to what you can afford. If you stay within safe parameters, you won’t be at risk of being strained if unexpected costs come up.
Obtain a Clear Title
If a tax sale house has liens or claims attached, it will take more money to clear the title, which may require a legal dispute. A clear title is needed if you’re looking to sell it or secure traditional financing.
Overbidding May Be Your Downfall
You’re setting yourself up to fail when you overbid and spend too much to be the highest bidder on a tax sale property. Turning the investment profitable will only take longer if you overbid. When bidding is too high for your budget and what you believe the property to be worth, skip it.
Invest the Time in Due Diligence
Do your due diligence on every tax sale property you intend to bid on. Ensure you research as well as you can to determine if there are any issues tied to your tax sale home that could impact your investment.
Position Your Tax Sale Property as Collateral
To secure financing or a loan, you may offer to a lender or be required to put up collateral. Instead of tapping into other assets and properties that are more valuable, turn to your tax-sale real estate investment.
Minimize Your Holding Costs
Holding costs refer to funds you put into maintenance, property taxes, and insurance while the property is yours. If the asset is not earning money, it becomes a loss. It’s crucial to start earning from your tax-sale property as soon as possible.
Pursue Strategic Renovations
Many tax-sale homes are not very well kept. If you intend to update and renovate and then resell, make sure the renovations add resale value. Remodel the kitchen or bathroom. Redo the layout to add property value specifically. Look at remodelling projects that generate peak ROI.
Focus On Neighborhood Value
Just because the tax sale property itself may have some issues, if it’s in the right area of its neighbourhood, the land alone may be worth an extraordinary amount. With this approach, you can make money simply by owning a parcel of land or lot in the right area.
Convert Tax Sale Investments Into Rentals
Buy tax sales homes, make a few fixes, and convert them into rental units. If they’re located in an area where long-term or short-term Airbnb-style rentals are in demand, this may be the path to making money. Even better, it’s consistent cash flow and passive income.
Consult a Real Estate Tax Expert
If you are a beginner to tax sale properties, you should seek expert help. There will be tax implications when you start renting or selling tax sale homes. For example, profits from a tax sale property may be subject to certain taxes. Always consult a tax professional and optimize your tax strategy to maximize your return and avoid overpaying your taxes.
Build a Portfolio of Real Estate Properties
If you’re successful with your sales investment, try another. Start building your portfolio with multiple properties. Focus on high-yield and stable properties, tax-sale homes, and regular non-tax-sale homes for a balanced portfolio that spreads risk.
Form a Real Estate Investment Group
If you are confident in your ability to make money with tax-sale homes, consider forming a real estate investment group. This group is a collection of investors who pool their money and resources to accumulate more real estate. It can be a very smart and profitable real estate investment strategy.