Yields on tax liens aren't as high as typically expected from a hedge fund's investments, but they carry less risk.
New York, NY (PRWEB) September 16, 2013
With the increasing volatility of the stock market combined with historically low interest rates has caused many investors to seek alternative avenues that can provide a decent rate of return. One investment niche that is often overlooked is real estate tax liens. This unique opportunity can provide knowledgeable investors with excellent rates of return in some cases, but they can also carry substantial risk, and novice buyers need to understand the rules and potential pitfalls that come with this market.
To mitigate this risk, investors have the ability to invest in private funds managed by experienced management teams. Traditionally, individuals purchased tax liens in the municipalities closest to home due to the logistics of processing the tax liens and performing the research involved with selecting the liens to purchase. This adds concentration risk to the tax lien portfolio. Experienced fund managers have the depth of staff and experience to invest across various states and municipalities which gives investors the diversification of risk and benefit of the various income structures provided by the various state statutes governing lax lien rates, penalties and liquidity.
Yields on tax liens aren't as high as typically expected from a hedge fund's investments, but they carry less risk. On a risk-adjusted basis, tax-lien portfolios provide higher yields than other fixed-asset alternatives. “Participation in a well-managed tax lien fund affords its investors the ability to capture solid, consistent, low volatility returns,” states Vincent Falci, General Partner of the Pantheon Tax Receivables fund. He continues; “With the current bond environment, tax liens are certainly an excellent alternative investment, providing significantly higher returns without higher risk.”
About $426 billion in state and local tax on real estate is owed in the U.S. each year. If a property owner is late on paying the taxes, a tax lien can be placed on his property. Twenty-eight states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands allow those liens to be sold to private investors, and about $6 to $9 billion in liens come up for sale each year. The local government gets its cash immediately, and the buyer gets the right to collect the delinquent tax, a penalty and interest on the late payment. These rates can run as high as 12% to 36% a year, depending on the state. The county needs the money now, not some time in the future. It needs that money in order to fulfill its budgetary obligations needed to pay teachers, police and firemen. By state statute, each county is authorized to collect the taxes due that remain unpaid by selling at public auction, either a tax lien certificate or a tax deed.
Each state has statutes which govern the auction process, lien processing, interest rates and penalties. In Florida, where lien auctions are conducted on the Internet, rates have been bid down recently to an average of 2.4% for liens on single-family homes. But buyers also get to collect a 5% penalty on the amount owed. In New Jersey, where individual municipalities sell liens at 500 in-person outcry auctions a year and interest rates can legally be as high as 18%, bidders have sometimes brought rates down to 0% and paid a premium, too. Why? The buyer not only gets the right to collect a 2% to 6% penalty but also first dibs on any subsequent tax liens on the same property at the full 18% interest rate. So in New Jersey, where taxes are owed quarterly, bidders sacrifice returns on a first lien with the expectation that the property owner will pay late in subsequent quarters and then they will get the full rate on the liens going forward.
John Hanratty, General Partner of tax lien fund Ebury Fund 1, LP, stated; “The benefits of New Jersey tax certificate investing compared to other states is there are auctions throughout the year, an ongoing opportunity to invest capital through the payment of subsequent amounts and NJ is a judicial foreclosure state. The negatives are the management of the portfolio is extremely labor intensive compared to other states and, similar to other jurisdictions in this yield environment, NJ's auctions are very competitive.”
About Tower Fund Services
Tower Fund Services is a third-party administrator offering a full spectrum of tailored outsourced solutions for hedge funds, funds of funds, separate managed accounts, multi-manager platforms, private equity, venture capital, tax lien, and real estate funds. Its suite of services includes fund startup consulting, accounting, compliance, NAV calculations, investor reporting, and tax services to alternative investment managers in all strategies and structures.