Five Types of Real Estate Investing You Should Avoid at all Costs

“Just don’t buy it!”  Was the basic response at a recent Real Estate event when asked about Tax Liens and a few other forms of investing!

And I don’t buy it!

Magnifier with home icon isolated on white.Real Estate investing has its risks and its rewards.  The higher the risk, the better the rewards.

So if you are looking at the following five forms of real estate investing, the risk is high.  You might have some time and cost involved in resolving issues.

1.  Buying Tax Liens:  This has been around as a form of real estate investing since probably there were real estate taxes on houses.  It basically involves two concepts.  One is the Tax Lien that is created when a property owner fails to pay their real estate taxes and the county allows you to pay the taxes for the property owner and places a lien against the property for you.  The property owner has a specified amount of time to pay you off with interest or eventually the county will take the property through a tax foreclosure and you end up with the property.  This can be highly lucrative if you know what you are doing.  And in many cases it does not take a lot of money to do.  But you need to research the property that you are paying taxes on as you don’t want to end up the proud owner of a 10×10 plot of land in the middle of a swamp somewhere.

2.  Buying Tax Deeds:  Similar to the Tax Lien, a property owner does not pay taxes and instead of allowing you to pay the tax, the property is sold for back taxes and you get the property.  This tax sale is a foreclosure on the property and needs to be completed in the proper manner to clean up all other liens on the property.  However, in many cases, the attorney on behalf of the county does not dot all the “I”s or cross all the “T”s and their is still clouded title.  So more often than not after you buy a property at a Tax Deed Sale, you will need to go through a Quiet Title Process that involves attorneys, money and time.

3.  Probate:  or any other property where the owner has passed away.  This involves tracking down the person or attorney who has the authority to sell the property and can involve a lot of time and money to clear the title.  If the there are no liens not a big problem, but if there are unreleased liens from long ago, it can be a daunting task of trying to track down releases or again take a Quiet Title Action.

4.  Defaulted Mortgages:  This form of investing usually starts with the big banks packaging up 1000s of loans that are not being paid and selling them to a hedge fund.  The hedge fund then usually breaks up this package into smaller groups of loans and sells to another hedge fund and maybe this happens again.  With each sale money is made and eventually the loans get to the group that will start attempting to get the borrowers to pay.  This last group that actually works the loans, then sell them off in ones and twos to the real estate or note investor.  This involves all kinds of rules, regulations and attorneys in an attempt to get the borrower to pay or to get the house and sell it or rent it to settle the debt.

5. Rental Property:  We all probably get the idea of buying a house and renting it out and this too has all kinds of risks.  And there are many risks and issues that come up with renting out property.  The biggest risk is that they will not pay and you have to evict them.  Another risk is that they might damage your property.  And in one extreme case, the evicted tenant . . . burned the house down . . . . twice as the first time did not finish the job well enough.

There are many other forms of real estate investing and each is risky as well.  So you should avoid them at all costs as you could loose your shirt  . .  . or you could make a lot of money.

Know Your Business!  Excellent words of advice from Michelle Winberry.  Yes all of the above can be risky but if you take steps to first educate yourself on how the business works, research the risks and rewards of each deal, and investor your time and money accordingly, then you can make a tidy profit.

It is interesting to note that of the above 5 types of investing, the major Hedge Funds across the country are investing heavily in four of them.  Thousands of people, fled the stock market and have turned to other places to invest and the Hedge Funds turned to Real Estate.  They are buying up defaulted mortgages, rental properties and tax liens across the country.  Because they have such HUGE buying power, they can demand lower prices, but they still do their own research.  They would probably be purchasing probate type properties as well, but there is no big central clearing house for those properties, so they can’t find them.

By the way, if you would like to learn more about Tax Lien and Tax Deed investing as a business and as a way to get to the real estate, be sure to check out the up coming MAREI meeting on June 10th.  I personally will be attending so I can learn more about the Tax Sale Side of the Business and then on Saturday the 14th, I am attending the workshop to learn the business of Real Estate and Tax Sales and how properties can be purchased for pennies on the dollar.  I have always been intrigued by the stories from people I know who buy a tax lien for $50 to $500 on some random piece of land, then get the land, and then seller finance it for $10,000 and make a profit of $9,500 plus interest.  And I have heard similar stories of people doing the same thing with houses . . . is it risky, sure, but if I didn’t take risks, well I would still be working  85 hours a week managing the local CVS Drug Store!