Property tax lien certificates can be a very profitable means of getting into real estate investment, so I thought I’d share some background information to explain what property tax liens are and why they offer such profitable returns. When a property owner is unable to pay their taxes for example, they can be issued with a tax lien certificate which simply provides a means to guarantee the creditor (in this case the tax collector) will receive the money they are owed.

The tax lien is secured on the personal property or real estate owned by the debtor - the most common form is the mortgage lien. There are several other types of tax liens but we’ll leave those for another line of discussion. Each variation of lien carries its own set of rules on how it is implemented, and each may also vary from state to state.

Here we are talking about property tax liens specifically, of which there are two main types; the particular lien and the general lien. A particular lien allows the investor (the person lending the money or providing the services to the owner) to claim access to the property (or the equity held within it). Liens are either legal (or federal) in nature - which means they are enforceable in a court of law - or equity liens which are bound by equity courts.

As a private investor, you are then able to buy tax lien certificates with the aim of profiting from the liened property. You need to be aware, however, that you are not actually buying the property - you are in effect lending the property owner the money they need to repay the lien certificate, but at an agreed rate of interest that was set at the sale of the property lien, and a pre-determined time period by which they must repay the money to you.. This rate of interest can vary anywhere between 6% and 50% depending on the state and various other factors.

So here’s how we make our profits. If the property owner is able to repay the value of the tax lien certificate back to you within the allotted schedule, including all interest owed to you, he retains ownership of the property, and his credit rating remains intact.

In the event where the property owner is not able to repay the tax lien back to you, in full, ownership of the property is transferred to you as the purchaser of the tax lien certificate. The property is now yours for you to do with as you wish.

Tax lien investments are pretty much guaranteed to make money whatever the outcome. Where the property owner is able to repay the lien on time, your profit is the amount of interest that was due from the lien certificate. If the property owner is not able to repay the certificate, you become the new owner of the property with nothing more to pay other than your original investment in the tax lien certificate.

The bottom line is that investing in tax lien certificates is relatively safe (providing you understand in detail how the process works, and where any potential risks lie), and is a profit focused way to invest in real estate.