The Direction of Your Business
Taking Control of Your Future
People who are serious about success in any new endeavor learn to hold themselves accountable for their performance. What we mean here is that in order to make your tax liens business productive and profitable, you should set performance standards for yourself.
For example, For example, when you buy tax liens, you should look at the activity as a process of managing a fund, much like a mutual fund manager. A fund manager will always focus on making sure that each of the individual stocks in the fund is performing to expectations. If a stock that was priced at $60 a share suddenly drops to $30 a share, the manager will investigate to learn what is going on and possible divest the fund of that stock and purchase something that performs better.
For a tax lien investor, that means that whatever money you have contributed to your fund, whether $500 or $500,000, or anything in between, should remain at work for you as productively as possible. Obviously if the fund manager withdrew money from the fund for personal use, he or she would quickly be out of a job and in jail, but even non-illegal activities like not finding the best possible stocks for maintaining the funds mission would jeopardize that manager's standing and position.
When you acquire properties, be that at auction, over the counter, or through foreclosing on a lien following the end of the redemption period, you should select properties that are useable and desirable, then employ good marketing principles in selling them as quickly as possible for a profit.
As a tax investor, you should always be looking for opportunities to make best use of your money. If you have money in any kind of investment or retirement that is making less than 10% per annum growth, you should roll that over into a qualified retirement plan and put that into tax liens. If you obtain a tax deed, unless it involves a property that can create cash flow immediately (a good rental for example), you should sell it immediately and put the profits into your money fund for further growth.
Any time you receive money back from a redeemed lien, the money needs to be re-circulated immediately. Money that just sits loses value. It becomes less valuable because inflation will erode its value over time.
Highest and Best Use of Money
Despite what we may have seen with the meltdown of the mortgage market and the resulting bank failures, banking has been an extremely profitable business over the course of centuries. We can take an example from their handling of money.
When money is in circulation, it increases in value. This is how banks make money – they keep cash in circulation. They leave very little money in the vault, rather they lend out every penny that the regulators will allow them to. Their spread, which is the difference between what they get for the money they lend and what that money costs them, might be only 2% or 3% on any one transaction. However, the money cycles through the system with every installment payment or with the payment of any 90-day business note. Since that happens all the time, on an annual basis the bank will be making15% - 25% from the money over the course of a year. Imagine that 90% of the monthly payment on a car loan is interest (i.e., profit to the bank), and you make 12 payments per year, even if the interest rate on the loan is only 5%, the bank could easily be making 24% by recycling that same money over and over.
Purchasing properties via tax deeds presents another solid source of income. Whereas the liens lead to long-term growth of wealth, deeds lead to immediate profit. You buy a property, you sell a property, and you take a profit. Ideally, the profits should go back into your business. That then gives you more money to put into circulation – to put to work for you.
Likewise, before you bid on a property at an auction, or prior to purchasing over the counter, you want to assess the property for value and to ensure that it does not have pitfalls and traps that might cost you money, to say nothing of depriving you of a profit.
You want to keep in mind that we are talking about two completely different kinds of investments. Purchasing liens involves money management with the purpose of growing lasting wealth. Obtaining properties is real estate investment, whether by buying a house from the bank or a couple who wants to retire to Florida, or getting a property through a tax deed sale in order sell it for a profit.
This business gives us a great choice: we can put money to work for long-term wealth accumulation with liens, and we can raise capital that increases our principal base for more rapid wealth growth by taking profits from properties.
We will address how to select good buys in either arena in the three following articles.