The Focus of Your Research
What Is Better, Liens or Deeds?
We find a strong parallel between buying deeds and liens through county and local government auctions and sales and purchasing properties directly from the owners. The later activity, commonly referred to as creative real estate investing has two basic components based on the exit strategy used.
An exit strategy is what one plans upon entering into a transaction for exiting at the completion with the money (be it cash flow or cash profit) in hand. With conventional real estate investing the most fundamental choices upon purchase of a property are to sell it immediately or keep it for long term.
Buy and Hold
When an investor sells a property, the result is immediate (or, at least, quick) profit. Holding a property allows the property to grow in value. This is a well-known strategy that has been taught in seminars for years and practiced for millennia (going back to ancient Rome and before). Its primary appeal lies in its simplicity. You buy a good property, rent it out to offset its cost, and wait for the property to appreciate.
The reason that people purchase and hold properties is for long term growth and wealth. The property owner collects rent primarily for the purpose of making it possible to hold on to the property. In the early years, any income realized beyond the costs of holding the property is a bonus.
The Focus of Your Research
What Is Better, Liens or Deeds?
We find a strong parallel between buying deeds and liens through county and local government auctions and sales and purchasing properties directly from the owners. The later activity, commonly referred to as creative real estate investing has two basic components based on the exit strategy used.
An exit strategy is what one plans upon entering into a transaction for exiting at the completion with the money (be it cash flow or cash profit) in hand. With conventional real estate investing the most fundamental choices upon purchase of a property are to sell it immediately or keep it for long term.
Buy and Hold
When an investor sells a property, the result is immediate (or, at least, quick) profit. Holding a property allows the property to grow in value. This is a well-known strategy that has been taught in seminars for years and practiced for millennia (going back to ancient Rome and before). Its primary appeal lies in its simplicity. You buy a good property, rent it out to offset its cost, and wait for the property to appreciate.
The reason that people purchase and hold properties is for long term growth and wealth. The property owner collects rent primarily for the purpose of making it possible to hold on to the property. In the early years, any income realized beyond the costs of holding the property is a bonus.
Much of the complexity of a Buy and Hold strategy comes from the overhead involved in owning a property. You don’t just buy a house: beyond debt service on the mortgage, you also have ongoing costs like taxes, insurance, maintenance, repairs, upgrades, water and sewer costs and marketing expenses. People often underestimate the costs of holding on to a property; these can easily amount to 25-35% of the rent before debt service. This kind of overhead requires capital in the business. Without capital, the you have to come up with the costs of holding a property on your own. If you are so strapped for cash that you are unable to take care of the rental property, you are in over your head. On the other hand, with enough capital in your business, your business can take care of these needs for you.
In short, people buy and hold real estate with the purpose of putting a portfolio of properties together that appreciates in value until someone else will pay a high price for it, or until it supports the owner with residual income.
Quick Profit
This is just as it sounds – a way to make a profit as quickly as possible. In terms of immediate return, this concentrates profit at one time more than any other strategy. However, your total income is smaller in this strategy than in any other. That is because there is no compounding, either of time or of income.
The key to this strategy lies in the buying. You act as though you are a buyer for a retail store. Your objective is to buy inventory and then resell it for a profit. In this case, the inventory is real property. You work to acquire properties at a price that allows you to quickly resell for a higher price. In this case, you can be either the wholesaler or the retailer, depending upon the price you sell at and the needs of the people you sell to.
With this strategy you get in and get out quickly. You realize your profit at once (at least within a short time period). Since this is the highest concentration of income, it is the best independent means of creating capital for building an investment business. The wisdom of this is that you reinvest this cash into properties. Now you can cover overhead, build equity, and by building equity enhance cash flow. Nothing has such an immediate and intensive impact on the capital situation of a new investing business as Quick Profit deals.
Liens and Deeds – Long-Term Growth vs. Quick Profit
When we compare the two real estate investing methods to tax sales, we immediately see that purchasing liens is much like buying a property to keep long-term; getting a property to flip is much like buying a tax deed. Buying a deed should lead to immediate profit. Since a lien is longer term, it resembles holding a property for a certain number of years: both activities lead to growth of wealth.
Therein lies the contrast. You buy deeds to capitalize – to bring capital into your investing business. When you buy a deed, you buy the property with the intention of quick sale for profit. On the other hand, a lien is a longer-term investment. In fact, you don’t really purchase a lien, you are putting your money to work for you, but it is still your money. We say you don’t buy a lien because when you buy something, you give your money away in exchange for something else of value. But with a lien, our money does not leave our possession.
Instead, we put our money into a vehicle to put it to work. It is still our money. So long as our money just sits, non-productive, it does us no good. If it is not making money for you, it as though it is sitting on your couch, playing video games and watching TV. If you instead put it into liens making a double-digit return, it is building wealth.
We would therefore emphasize that one method is not better than another. Obtaining liens is certainly simpler and easier to do, as you have already read. Deeds take more research and analysis prior to the purchase, and then you must dispose of the property afterward. It is more work, but on the other hand you get immediate profits so that you can put more of your money into liens.
The liens build your financial independence fund (we don’t call it a retirement fund, because retirement turns into inaction without growth, the first step toward falling apart and becoming decrepit): when you are financially independent you can maintain your chosen life style without the need of a job. If you continue to work, it is because you enjoy the work, not because you need the money.
Your portfolio of tax liens represents your financial independence wealth fund. It is not for immediate use, but if you take care of it and manage it as though it were a mutual fund, it will put you in the position to live the kind of life you desire.
This independence fund might not be the most important thing in your life; God and your family occupy that position. But you can enjoy your family more and contribute more to society when you no longer have the need to work a job. That is why you create a financial independence wealth fund.
A Long-Term Plan
Given the differing roles of the two methods of working with tax-delinquent properties, they both fit very well together. Both are good, beneficial and deserve your attention. Based on our observations of the market and the success of our clients over the years, we feel that your best approach to this business would be as follows:
1. Start by obtaining a few liens liens to break the ice, get your feet wet and demonstrate to
yourself that you can do this. It doesn’t matter whether you get them at auction or over the
counter. These liens constitute the beginning of your financial independence wealth fund.
2. Buy a few properties to increase your capital base – more money into your financial
independence fund. You buy them at between 10 and 50% of value and then sell them
quickly to infuse additional capital into your independence fund. These will also be available
at auction or over the counter.
3. Buy liens, buy more liens, buy still more liens, all the while you keep your eyes open for
deeds. Liens are easier to find and dispose of than deeds – you should just pick them up
the way you might select a dozen apples at the grocery store: if it looks good, just take it
and don’t think twice. With deeds you analyze the property more closely and then sell it.
4. Manage your financial independence fund to make sure all that money is working for you: if
it is not bringing in 10% per year, it is sitting on your couch eating all your food and just
watching TV. Make sure it stays productive.
With a good balance between the two you have plenty of money to put into your financial independence fund so that your fund continues to grow until you have achieved genuine freedom.
If you do this, you will have the life you desire. Obviously this is a state that eludes most people in the world do, but that is because they don’t take the necessary steps. Getting to that point will take sacrifice. You may have to give up a few things. Sometimes the things you sacrifice are good, but you give them up for better. In reality the only things more important than your financial freedom would be God and your family.
If finding success makes you part of the minority that is a good thing, because people who prepare like nobody else eventually get to live like nobody else. That is freedom.
